Your Window Into the World of Wealth
Third Quarter 2011 A Publication of Newsmax.com and Moneynews.com Vol. 4 No. 3
Key Points The Changing Face of
• Consider These Benefits of Fund of Fund of Funds Funds Investing
• Some Drawbacks to By Julie Crawshaw Keep in Mind, Too Funds of funds (FoF), which essentially hold a portfolio of other investment funds that represent various asset classes and market sectors instead of • ETFs: Alternatives to holding equities, bonds, and other securities directly, are becoming increasingly Traditional Fund of differentiated to deliver more specialized services to investors. Funds? “There’s a whole series of issues going on now in the market around transparency: risk, performance, quality of the firms, and even the fees,” says • Making Money In a Slow Economy Wayne Cutler, managing director at Novantas LLC based in New York City. “That’s good news for investors.” • Seek Absolute Returns The idea behind FoF investing is that a fund of funds is able to move money between the best funds in the industry, thereby increasing shareholders’ returns • Bypass Bonds, Preserve with more diversification than a single fund offers. Capital Funds of funds usually are organized in a fund family of their own. They offer funds that specialize in the entire universe of investments, including Plus those in Europe and other mature markets, emerging markets, fixed income, aggressive growth, hedge funds, and private equity. • Increase Holdings in Though fund-of-funds investing was very popular in the 1960s, it faded Emerging Markets substantially when a scandal involving FoF Equity Funding surfaced in the 1970s. Today, the funds clearly are making a comeback, and new models are • Tax Audits Expected to appearing that use multiple investing strategies, including edge funds, private Increase Dramatically equity, and index investing. In the past, fund-of-funds investing relied on active fund management, but there now are some exceptions from which investors can choose. Exclusive to For example, take the ones that Mark Matson, CEO of Matson Money, Current Subscribers advises about. “We’re rare in the fund-of-funds space,” Matson says. “We subscribe to market efficiency and the modern portfolio theory [MPT], so we Current subscribers have do our best to eliminate stock picking and market timing and track record instant access to any and every past edition of investing from the process.” Matson manages more than $3.1 billion for investors across the country. His Private Opportunities funds have thousands of stocks in them and include large-, mid-, small-, and Club Newsletters micro-cap stocks from more than 40 countries. Simply go here: Another benefit of relying on market efficiency and MPT is reducing overall privateopportunities.com fees to the client. “For example, our U.S. portfolio we have 99 basis points Check your e-mail for including our fee and the fund fee,” Matson says. “That’s very unusual. Even this month’s password the usual mutual fund fee at Morningstar is 135 basis points. We’re cheaper (Please remember to use than most mutual funds that aren’t even funds of funds.” lowercase letters.) Matson Money offers three funds: a free market international fund, a free market U.S. fund, and free market fixed income in these 1 or 2 percent return investments. We fund. “We use the model to create diversified need to take a little more risk,’” Cutler says. “They portfolios,” he says. “For example, our U.S. fund don’t have access to hedge funds, so they put 5 has U.S. large, micro, small value, and within that percent into a Fund of Funds. They don’t have one portfolio we might have 4,000 stocks at any access, or the time and resources to research it, so one time in the different categories we build.” they invest in a fund of funds.” Potential ease of creating portfolio Benefits of FoF Investing diversification: Taken together, the three Matson funds of funds include 18 different asset categories To Consider in 44 different countries with more than 12,000 One-stop shop: Paul Jacobs, CFP, a financial different stocks in planner with Palisades Hudson, believes that the “For an investor the portfolio. “It’s main benefit of FoF investing is that these funds who does not very difficult for any serve as a one-stop shop that can let investors put investor, even one their portfolios on autopilot. have the time with a billion dollars, “This, of course, is assuming that the fund and interest to to create that kind of is managed by a quality manager,” Jacobs says. diversification inside “For an investor who does not have the time monitor several a portfolio without and interest to monitor several mutual funds and mutual funds the fund-of-funds periodically rebalance a portfolio, funds of funds and periodically structure,” Matson provide a way to delegate that responsibility to a says. fund manager.” rebalance In addition, However, even though some may think a portfolio, building a balanced FoFs advertise themselves as a way to put your portfolio on robopilot, Jacobs believes that funds of funds and diversified any investor needs to track the fund and all the provide a way portfolio of fund underlying investments. “Unless you know what to delegate that managers across a the underlying investments are, you could have a variety of investment rude awakening later,” he says. “We saw this in responsibility to strategies and 2008, when people thought that their funds of a fund manager.” targeted returns reduces the aggregate funds were safer than they actually were.” — Paul Jacob Access to investments that otherwise might portfolio risk. be out of reach: Saif Mansour, managing partner “If one particular of Breakwater Investment Management LLC and fund manager has a poor performing year or US Capital Partners, sees many benefits to FoF one individual investment sector has a negative investing. The first is that top-tier funds of funds growth period and an investor is concentrated are able to access a best-in-class subset of fund in that particular fund, there is the potential for managers, including hedge fund and private equity, substantial capital loss,” Mansour says. that might not be available to the individual So, with a carefully constructed portfolio of investor otherwise. fund strategies and investments, managed through FoFs frequently are used to invest in hedge a fund of funds, the entire portfolio should not be funds and private equity funds, which typically at great risk if one fund manager or strategy has have higher minimum investment requirements. negative performance. Cutler says that, although large pension funds and FoF diversification can open additional money- university endowments continue to invest directly making opportunities as well. For example, after in hedge funds and private equity, many smaller the recent tsunami, Japan’s market dropped 11 ones that haven’t been getting the returns they need percent. “Because we have over 45 countries in to support their capital requirements are turning to our international fund and new cash coming in fund-of-funds investing to boost their yields. every day, we were able to buy Japan on the dip,” “Everyone’s saying, ‘We can’t keep our money Matson says. “Without a fund-of-funds structure,
2 Private Opportunities Club • Third Quarter 2011 the average investor is not going to be able to basis, Matson keeps those different categories achieve that.” rebalanced at the fund level, thereby gaining more Years ago, Matson says, a diversified portfolio control over risk. might have had eight different mutual funds. “It Professional management: A professional was very difficult to manage because you had manager does due diligence on the underlying to juggle eight pieces, and every time you made investments for you. “You always have to do some a transaction, there were tax implications,” he due diligence. but as opposed to doing it around says. “Tracking all these moving parts within one 10 different hedge funds, you just do it around client’s portfolio made tracking on a daily basis a one manager who puts 10 funds together for you,” nightmare.” Cutler says. “What you have to do is select the Then, at the end of the quarter, when it’s time right fund of funds manager.” to rebalance, perhaps three or four different “Frankly, I’d be pretty nervous buying into a investment categories were off 1 or 2 percent. The fund of funds without some type of third-party manager had to generate five or six transactions, research such as Morningstar,” Cutler says. which can be expensive from both a tax and “Basically, you need to either be very conservative trading standpoint. “It makes rebalancing a client’s or say ‘this is my very, very high-risk money.’ It’s portfolio very difficult,” Matson says. less of a gamble because you’re doing funds of In contrast, Matson’s FoF portfolios have only funds, but I’d still rely on research.” three moving pieces: U.S., international, and fixed Mansour stresses the importance of thoroughly income. Within each one of those funds of funds, understanding the investment strategies both the there might be anywhere from five to eight funds. top-tier manager and managers for the underlying “On a quarterly basis at the client level, all I have assets use. “Make sure that the portfolio of funds to do is rebalance those three pieces,” Matson has diversified focus and the individual funds says. “On a daily basis, I keep the fund of funds within the portfolio continue that diversification balanced to its specific target.” mindset to mitigate risk even further,” he says. Assuming there are eight different pieces in “You do not want concentration within each portfolio, as new cash comes in on a daily one fund or within an asset class as a whole,” Mansour says. U.S. Equity Fund US Micro Cap Portfolio 15.0% Drawbacks to Keep US Small Cap Portfolio 15.0% In Mind, Too US Small Cap Value Portfolio 25.0% High Fees: Though the Securities and Exchange US Large Cap Value Portfolio 30.0% Commission now limits the total amount of fees US Large Company Portfolio 15.0% investors can be required to pay to a fund of funds, fees remain a problem for many of these International Equity Fund investments. Traditionally, most funds of funds have been Continental Small Co. 4.0% managed actively, with management fees paid Japanese Small Co. 2.0% to the FoF manager and to each manager of the Asia Pacific Small Co. 2.0% underlying funds. Such high fee funds include United Kingdom Small Co. 2.0% actively managed funds, foreign funds, and exotic Int’l Small Cap Value Portfolio 40.0% funds. Int’l Value Portfolio III 30.0% “Typically, you’re not only paying the fees on Int’l Large Cap 5.0% the underlying mutual funds, you’re also paying the Emerging Markets Small Cap Portfolio 4.88% manager a fee for expertise,” Jacobs says. “With Emerging Markets Value Portfolio 4.88% an index portfolio, you could have a much lower Emerging Markets 5.25% expense ratio with similar market exposure.” Source: Matson Money In fact, many of these funds work on 2/20,
Private Opportunities Club • Third Quarter 2011 3 which means the fund charges 2 percent of assets do so if you’re using one of these funds.” under management, plus 20 percent of profit. However, sometimes these clients have friends “This is fine so long as they are doing well,” Cutler or relatives who are just starting out as investors says. “If you’re earning 30 percent return, who to whom these funds are more useful in setting cares? The problem is, that’s difficult to do over up a diversified portfolio using a small number of time, and so the fees will just kill you.” funds, he says. “There’s a big range here,” Cutler warns. “You Poor or unethical management: The safety have to do the math and calculate the net amount of investing in FoFs came under fire when Bernie that would be taken away.” Madoff’s Ponzi scheme was uncovered, because There are, of course, some notable exceptions, many FoFs invested heavily with him. Eventually, including Matson’s market-efficient, MPT FoFs. it became clear that one reason for these buy-ins “With some FoF funds, the fees are not was that Madoff didn’t charge high fees, which onerous,” Jacobs says. “VanGuard offers both helped investors believe he was performing well. target-date funds and funds of funds, and I would Now, of course, we know that the reason he not classify those fees as excessive, but there didn’t charge much are some funds of funds out there for which the “Evaluate your was that he wasn’t aggregate expense ratio is well over 2 percent.” investment doing anything except One fund Jacobs has recommended is the stealing investors’ VanGuard Star Fund, which has an allocation performance money. target of 60 percent equities and 40 percent fixed reports beyond Additionally, during income. “With this fund, investors do pay fees simply looking 2008 and 2009, the for the fund and for the underlying funds, but the media and investors aggregate fees aren’t very high, probably less than at returns battered FoF investing 1 percent,” Jacobs says. performance . . .” because of false claims Increased distance from the investments: that ambitious FoF — Saif Mansour Because a fund of funds has a top-tier manager marketers made about who manages the underlying investment funds, the strength of their investors are at least once removed from control due diligence processes. over their investments. Such funds just don’t work Mansour warns investors to check for ethical well for investors who take a hands-on approach. management and best practices in reporting. Jacobs says he rarely uses target date or other “Lately, there’s been a plethora of Ponzi schemes funds of funds because most of Palisades Hudson’s and dirty practices. It is essential that individual clients want more direct control over their investors check the performance record and portfolio allocations. backgrounds of the fund managers they are “These funds can be very difficult to include as investing with,” he says. part of a portfolio, because you have no control Had Madoff’s investors done this, they would over the underlying assets allocations within have seen the red flags and pulled their money out them,” he says. “If you have an asset allocation before Madoff spent most of it. you’re trying to stick to, it can be very difficult to “Also, evaluate your investment performance reports beyond simply looking at returns performance, but ensure the fund manager has Fixed Income Fund provided third-party reviews and audits from a One Year Fixed Income 4.0% reputable institution that confirm their internal Two Year Global Fixed Income 2.0% record keeping.” Intermediate Government Fixed Income 2.0% FoF investors should do detailed due diligence Inflation Protected Securities 2.0% before investing, looking carefully at the fund Five Year Government 40.0% manager’s ability to allocate capital in a balanced Five Year Global Fixed Income 30.0% fashion and whenever possible evaluate the Source: Matson Money individual funds that make up the underlying
4 Private Opportunities Club • Third Quarter 2011 investments, Mansour funds of funds with ETFs,” he says. “Do your research says. “Unfortunately, there’s Private opportunities Club is a publication with diligence. Look at the a lot of speculation and of Newsmax Media, Inc., and Newsmax.com. It is investment criteria, and hold gambling going on. Usually published occasionally for accredited investors and is offered online and in print through Newsmax.com and managers accountable. Check they’re investing in bubbles, privateopportunities.com. the track record behind fund buying whatever has been hot For reprints permissions, contact the publisher at managers, look for specialized lately.” P.O. Box 20989, West Palm Beach, FL 33416. expertise, and if they are an So you've decided to invest Chief Executive officer Christopher Ruddy asset,” he says. in a fund of funds, how do Jacobs concurs, adding you go about choosing a Financial Brain trust Lord William Rees-Mogg that the track record for good one? David Frazier, Axel Merk, Hans Parisis the manager of a fund of Here are Matson's Financial Publisher funds is important. But that recommendations: Aaron DeHoog he believes that the track • Low cost and high Editor Elaine Barr records for the managers of quality: Aim for a fun with art/Production Director the underlying funds are even total fees of 1 percent or Elizabeth Dole more important. less. Look for funds that are “A lot of times with institutional quality that are ContaCt these funds, you’ll see a core not available to the public For more info about the portfolio,” Jacobs says. “I saw but must be purchased Private Opportunities Club: one with an underlying fund through an adviser. that made up 2 percent of the When you buy the more Gina Salzo fund. That doesn’t require readily available funds of 1-888-471-8009 (extension 1280) as much tracking as an funds, public ones are more 1-561-471-8009 (extension 1280) likely to suffer massive or underlying fund that makes redemptions if the market [email protected] up 20 percent of the fund.” crashes. ETFs: Alternative to • Avoid hot shots and “gurus”: Look for a FoF DiSClaimEr: The owner, publisher, and editor are not Traditional FoF? that eliminates stock picking, responsible for errors and omissions. This publication is Jacobs points out that it’s intended solely for information purposes and is not to market timing, and track be construed, under any circumstances, by implication easy to understand the growth record investing. That way, or otherwise, as an offer to sell or a solicitation to buy of alternative investments you'll know exactly what the or sell or trade in any commodities or securities herein named. Information is obtained from sources believed such as exchange-traded funds mix of assets is in the fund to be reliable, but is in no way guaranteed. No guarantee (ETFs), which come with you’re buying. of any kind is implied or possible where projections of future conditions are attempted. In no event should trade costs only. • Low turnover: Choose a the content of this market letter be construed as an “You trade online for $10, fund of funds with less than express or implied promise, guarantee, or implication and that’s not even a basis 19 percent turnover of the by or from Private Opportunities Club or any of its officers, directors, employees, affiliates, or other agents point if you make money stock internally in the fund. that you will profit or that losses can or will be limited when you sell it,” he says. “The average Morningstar in any manner whatsoever. Some recommended trades may involve securities held by our officers, affiliates, “The ETFs that are being mutual fund has 100 percent editors, writers, or employees, and investment decisions created are a challenge for the turnover of its holdings every may be inconsistent with or even contradictory funds of funds, at least for the to the discussion or recommendation in Private year,” says Matson. “All that Opportunities Club. Past results are no indication of equity markets.” turnover means commissions, future performance. All investments are subject to Matson is a less optimistic bid/ask spread costs, and risk, which should be considered before making any investment decisions. Consult your personal investment about ETFs, especially funds- market impact costs. All advisers before making an investment decision. Please of-funds models. “As ETFs of these are very profitable view our Terms of Use for full disclosure at www. newsmax.com/terms.html. Copyright © 2011 Private become more popular, we’re for the brokerage firm but Opportunities Club. seeing more people opening destructive to the investor.”
Private Opportunities Club • Third Quarter 2011 5 Making Money in a Slow Economy
Investing in a slow-growth economy calls for chief investment officer of Financial Advantage. a lot more than employing classic asset allocation Investors need to focus on getting an absolute and buying index funds, advisers say. The answer return, he says. to making money today lies in switching to a more “I don’t think we’ll have for a long time the flexible, absolute-return strategy. kind of environment in which someone can get Here are six tactics advisers recommend that high returns and make up for the years they investors use to boost returns and avoid losses in should have been saving,” Martin says, adding their portfolios: that the whole Index funds have been a failed strategy for “Embrace the world is enormously 10 years, says Richard Leader, president and opportunities more unstable and chief investment officer of First Houston Capital. much more prone to Because they are capitalization weighted, indexes this market provide us with big tend to get people into the most popular — and, presents instead surprises now. therefore, the most risky — stocks. of worrying over “You need to “It’s not that the stock market has failed people have a portfolio that or that stocks have failed people,” Leader says. what it doesn’t can adapt quickly to “Indexes and index funds have failed people.” offer. Try not to unpleasant surprises, The reason is that companies that are whether those be overvalued and risky frequently dominate the over-focus on from terrorists, indexes, Leader says. “Ten years ago, most the short term.” regulators, or cross- investors put most of their assets in the S&P 500 — J. Michael Martin border currency index, where companies like Enron and WorldCom moves,” he says. imploded,” he explains. Developing such a portfolio means being out of However, simply because a few companies tanked sync with indexes much of the time, Martin says. does not mean that savvy investors should avoid It also could mean lower average annual returns the stock market altogether, Leader says. High- because reducing the downside volatility means quality, profitable companies can still be found. giving up something on the upside. “When people say, ‘You can’t make money in Choosing companies agile enough to respond the stock market’, it really means they themselves quickly to crises is essential, Martin observes, haven’t made money there yet,” he says. “Just don’t adding: “If you want growth, you’ve got to find it buy when you feel euphoric or sell when you feel in the character of the companies you invest in.” panicky.” “Google, for example, has had to deal with Wealth coach Deborah Owens concurs. some pretty wild global issues, but it looks to me “The fact is, now is when you need to be investing, like management understands this is a volatile when markets are down,” says Owens, founder world, and they’ll figure it out as they go along. and CEO of Owens Media Group. “Invest in “I think Con-Agra is figuring out the value companies that are going to weather and profit grocery game with product innovation. Panera from downturns in the economy. Companies Bread has a great balance sheet and a menu that’s like Wal-Mart, Costco, BJ’s Wholesale Club,” different,” Martin says. companies that make products and offer services people have to buy regardless of whether the Bypass Bonds, Preserve Capital economy is up or down. With bond interest rates where they are now, you’re not getting compensated for the risk. Seek Absolute Returns “A 30-year Treasury yielding 4 percent is High government debt levels in the United awful,” notes Matthew Tuttle, CFP, CEO of Tuttle States, Europe, and Japan are a drag on economic Wealth Management. Tuttle says his portfolios are growth, says J. Michael Martin, president and mostly in cash now.
6 Private Opportunities Club • Third Quarter 2011 “Preserve your capital,” Tuttle advises. “The “I don’t know,” Martin says. “But if we can buy whole idea of being tactical is that you avoid the all their advantages for the same P/E as developed large, long-term loss when everyone else is getting market stocks, we would rather do that, and since creamed.” we can’t have any idea of the volatility, we’ll do it The fact that we’ve been in a 30-year bull bond with dollar-cost averaging.” market means that people who jump onto the Historically, dividends have accounted for about bond bandwagon are getting in on the tail end — half of the total return on stocks, Martin notes. and that is never the best place to be, Leader says. “With less top-line growth, that will be true again,” Don’t flock into bonds today just because he says. “Making investing in companies with they’re popular, he advises. the financial and market strength to boost their “Start thinking about buying quality things payouts over time is a smart move now.” when they’re cheap. Find good quality common Dividend payers offer the additional advantage stock, profitable companies paying good dividends, of providing capital for additional investments and buy them when they’re not popular. If your when investors elect to reinvest dividends instead time horizon is two or three years, chances are of spend them, even though dividend investment is you’ll make money.” a long-term strategy. Martin also says that buying shares makes more sense than holding a lot of bonds. “About 40 percent Leave the Follow-the-Pack of our portfolio is bonds now, but they’re pretty short term, very high quality, and mostly corporate.” Mentality Behind Lending money is more dangerous than it used All too often, investors are unduly influenced by to be. But having too much in low-yield government what their friends are doing, Leader says. “Several bonds will expose you to inflation risk.” years ago, everyone was buying and flipping rentals. But did most people get into that when it Increase Emerging was cheap and out of favor? No.” It may take courage when discussing investing Market Holdings strategies with friends and colleagues who’ve fled Besides buying companies that are able to from stocks to bonds, to say, “I know everybody adapt and be resilient to negative surprises in their thinks I am fool to invest in the stock market now, industries, Martin says his firm is being defensive but Coca-Cola’s not a bad company at 12 times by gradually overweighting emerging markets. earnings.” But Leader says, “It’s better to be a lone Emerging markets have numerous advantages wolf than a pack member now.” over the OECD world now, including complete Owens echoes that belief. “Develop a wealthy access to all the technologies that developed mind-set and don’t follow the herd. The fact countries have, Martin says. So many advantages, is, now is when you need to be investing, when in fact, that Martin’s firm is increasing its stake in markets are down. Even though people are calling emerging markets by 1 percent a quarter. this a slow-growth economy, the fact is that “They have a huge standard-of-living gap to be markets are cyclical, and we’re in a downturn. filled, an enormous labor cost advantage, a debt/ Look at companies that are going to profit in this credit advantage because their potential consumers environment.” are not burdened with debt the way they are in Finally, embrace the opportunities this market Europe and the U.S., and their companies and presents instead of worrying over what it doesn’t governments have great cash flow,” he says. offer. Try not to focus too much on the short term. “Generally, the P/Es in developed and emerging Instead, think more about what you’re paying countries aren’t all that different now, but you have and about the prospective earnings power of what the growth advantage.” you’re buying, Martin advises. The big question is: Can emerging markets “Regardless of whether you inherited or saved develop as fast as they have been when the your nest egg, or sold a business, you should get developed countries that are their markets are the highest risk-adjusted return you can get,” flattening out? he says.
Private Opportunities Club • Third Quarter 2011 7 Tax Audits Slated to Rise Dramatically
Even though the top 40 percent of all U.S. where they in effect ‘drop a line’ to see if anything taxpayers pay 86 percent of all federal tax comes up,” Colella says. ”State taxing authorities liabilities (not just income tax), the IRS appears are also increasing efforts to collect tax dollars.” to think that well-off taxpayers have an unlimited Such increased tax-gathering efforts demand amount of money stashed somewhere that they’re that taxpayers be particularly vigilant in keeping ready to hand over to the government. complete, accurate supporting documentation for In fact, the IRS itself reports that the percentage the deductions they claim, says David A. Lifson, of taxpayers who were audited in the fiscal year CPA at Crowe Horwath. This is especially true ended Sept. 30, 2010, increased in every category because the number of correspondence audits, of adjusted gross income above $500,000, which tend to target one or two items on a compared with a year earlier. taxpayer’s return, undoubtedly will increase. If The biggest audit increases were at the top you don’t have documentation supporting the income levels — 18 percent of taxpayers earning deductions you took, then the IRS probably will at least $10 million were audited in fiscal 2010, 1 order a full-blown, in-person audit. percent more than in fiscal 2009, according to the Audit letters requesting proof for deductions for IRS. For those earning $500,000 to $1 million, the charitable contributions and interest on mortgage audit rate rose from 2.8 percent to 3.4 percent. payments are two that Lifson sees increasing. “The government decided the IRS needed a When the IRS started auditing returns for more global view of the revenue stream of high net charitable deductions, the agency discovered that worth taxpayers,” says Stephen Colella, CPA at most people were lying, perhaps deducting the Dicicco, Gulman & Company. “Because the taxes cost of a case of wine won at a charity auction as of high net worth people are more complex, the a charitable contribution because the check that government also decided IRS agents needed more paid for the wine was written to a charity, sophistication.” Lifson says. So, during the latter part of 2009, the IRS “If you contribute more than $250 to a ramped up its efforts to target high-wealth charity, you need a letter from the charity that individuals aggressively with a new Global High substantiates this and details anything you received Wealth Industry Group. Even though the IRS in return,” he says. has not defined specifically what “high-wealth” The rules for mortgage interest are quite individuals means, the agency has indicated that it complicated, Lifson warns. “You want to make sure will focus on individuals and families with “tens of you follow the law,” he says. “You can only deduct millions of dollars” in assets or income. interest expense on $1.1 million in mortgage debt, so if you’re carrying a $2.2 million mortgage on The IRS Goes Fishing your fancy house at the beach, you can deduct only The IRS has hired flow-through specialists half the mortgage interest you’re paying.” and international examiners and is considering Moreover, if you deduct more than $50,000 to hiring economists, appraisal experts, and industry $60,000 a year in mortgage interest, there’s a good specialists who will review not only taxpayers’ chance the government will want you to provide individual returns but also the returns for proof. their related entities, including trusts, private However scary all the above may sound, Lifson foundations, partnerships, equity-sharing advises that good record-keeping easily defuses. arrangements, and privately held and related “If you keep good records, the audit will go away entities in which the taxpayer may have actual or fast,” he says. “You make the necessary copies, beneficial ownership, Colella says. send them to the IRS, and you’re done.” “The general premise is that they’re going after “If you worry when you get audited, you waited people with large amounts of wealth, sometimes too long to worry,” he says. “Keep good records, using what we refer to as ‘fishing expeditions’ and you should have zero fear of an audit.”
8 Private Opportunities Club • Third Quarter 2011