Wealth Management Financial Analyst Treatise

374 Pages·2012·2.5 MB·English

by  Prof. G. Mentz

Private Wealth Management Guide – George Mentz, JD, MBA
Wealth Management
and Financial Planning Treatise

A Treatise & Reference Guide for Wealth
Managers and Wealth Management Executives

Fundamentals of Wealth Management for The
Wealthy and International: Financial Analysts,
Portfolio Managers, Asset Managers, Wealth &
Trust Management Professionals

Prof. George S. Mentz, JD, MBA, CWM ®
Counselor of Law USA - International Lawyer

This book is intended to be a research tool for students of finance worldwide. The book
has a US Centric Focus on economics, banking, investments and taxation. This book
will help you find information that you need and to learn more about the wealth
management and financial planning world.

*No tax investment or legal advice provided herein. Please consult with a licensed
professional in your jurisdiction before making any important financial or legal decision.

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Private Wealth Management Guide – George Mentz, JD, MBA

Wealth Management
and Financial Planning

Printed in the United States of America

All rights reserved 2007-2012. No part of this book may be reproduced by any mechanical, photographic,
or electronic process, or in the form of any audio recording or version. Nor, May it be stored in any
retrieval system, transmitted, or otherwise by copied, cloned or reproduced for private or public use other
than fair use as brief quotations embodied in the articles an reviews without prior written permission of the
publisher. No responsibility is assumed for your actions in relation to the teachings of this book comments
or insights. The intent of the author is only to offer information of a general nature to help you in your
quest for financial education. Please consult a licensed professional before making any important
decision. All Rights Reserved.

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Private Wealth Management Guide – George Mentz, JD, MBA
Table of Contents:

Table of Contents: ............................................................................. 3
Guide to Financial Statements ........................................................... 6
The Basics ............................................................................................................ 6
“Show me the money!” ........................................................................................ 7
Balance Sheets .................................................................................................... 7
Income Statements .............................................................................................. 9
Earnings Per Share or EPS ..........................................................................11
Cash Flow Statements ......................................................................................12
Operating Activities ........................................................................................12
Investing Activities ..........................................................................................12
Financing Activities ........................................................................................13
Read the Footnotes ...........................................................................................13
Read the MD&A .................................................................................................14
Financial Statement Ratios and Calculations ...............................................14
Saving and Investing........................................................................ 17
Define Your Goals ........................................................................... 17
Making a Financial Plan – Wealth Management and Financial Planning
........................................................................................................ 18
Figuring Out Your Finances ..........................................................................18
Your Net Worth Statement ............................................................................18
KNOW YOUR INCOME AND EXPENSES ................................................19
Small Savings Add Up to Big Money ..........................................................20
Pay Off Credit Card or Other High Interest Debt ......................................21
Risk Tolerance ................................................................................. 22
Savings ................................................................................................................22
Investing ..............................................................................................................23
Diversification .....................................................................................................23
Risk Tolerance ....................................................................................................24
Investment Products ........................................................................ 24
Stocks and Bonds ..............................................................................................26
Mutual Funds ......................................................................................................27
What is a mutual fund? ..................................................................................27
Mutual Funds Without Active Management ...............................................27
HOW SECURITIES ARE BOUGHT & SOLD ................................... 28
Watch "Turnover" to Avoid Paying Excess Taxes ....................................32
Selecting a Financial Professional ................................................... 32
What If I Have a Problem? ...............................................................................34
Other Investment and Insurance Products – Insurance and Annuities34
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Private Wealth Management Guide – George Mentz, JD, MBA
The Insurance Industry .....................................................................................34
Estate Planning ..................................................................................................37
How Estates Are Taxed ........................................................................................39
Trust Funds and Minimizing Estate Taxation ......................................................39
Basics of Life Insurance Policies and Types of Insurance ................ 63
Life Insurance .......................................................................................................63
What Is a Variable Annuity? .............................................................................77
How Variable Annuities Work ..........................................................................79
The Death Benefit and Other Features ..........................................................81
Caution! ............................................................................................................82
Variable Annuity Charges .................................................................................82
Tax-Free “1035” Exchanges ............................................................................84
Bonus Credits .....................................................................................................85
Ask Questions Before You Invest - Annuities ...............................................87
US Treasury Investments Basics ..................................................... 89
Online Investing ............................................................................... 95
What You Need to Know About Trading In Fast-Moving Markets .........95
Online trading is quick and easy, online investing takes time ................96
Set your price limits on fast-moving stocks: market orders vs. limit
orders................................................................................................................96
Online trading is not always instantaneous ................................................97
Know your options for placing a trade if you are unable to access your
account online .................................................................................................97
If you place an order, don't assume it didn't go through ..........................97
If you cancel an order, make sure the cancellation worked before
placing another trade .....................................................................................98
If you purchase a security in a cash account, you must pay for it before
you can sell it ...................................................................................................98
If you trade on margin, your broker can sell your securities without
giving you a margin call .................................................................................98
No regulations require a trade to be executed within a certain time......99
More Information.............................................................................................99
What To Do If You Have a Complaint .........................................................99
Stocks and Financial Research ...................................................... 100
Getting Info About Companies ....................................................... 100
Corporate Reports ...........................................................................................100
Other Types of Information.............................................................................101
Mutual Funds ................................................................................. 102
Key Points to Remember ............................................................... 102
How Mutual Funds Work ................................................................ 103
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Private Wealth Management Guide – George Mentz, JD, MBA
What They Are ..................................................................................................103
Advantages and Disadvantages ....................................................................105
Different Types of Funds ................................................................................106
How to Buy and Sell Shares ..........................................................................109
How Funds Can Earn Money for You ...........................................................110
Factors to Consider ....................................................................... 111
Degrees of Risk ................................................................................................111
Fees and Expenses .........................................................................................112
Classes of Funds .............................................................................................116
Tax Consequences ..........................................................................................117
Avoiding Common Pitfalls .............................................................. 117
Sources of Information - Prospectus .................................................................118
Past Performance ............................................................................................121
Looking Beyond a Fund's Name ...................................................................122
Bank Products versus Mutual Funds ............................................................122
If You Have Problems .................................................................... 123
Glossary of Key Mutual Fund Terms .............................................. 123
Retirement Planning ...................................................................... 128
10 Tips for Retirement ................................................................... 131
Home Mortgages and Loans for your Home .................................. 134
How the USA Economy Works ...................................................... 147
The USA Stock Markets and Financial Markets ............................. 163
The Stock Exchanges..........................................................................................165
Economic Terms and Glossary ...................................................... 176
Financial Glossary ......................................................................... 187
Appendix - Wealth Management and Trust Glossary ..............................193
Wealth Management Definition and Trends .................................. 265
Taxation in the United States – History & Updates ........................ 267
Educational Planning and College Planning................................... 283
Types of Retirement Plans ............................................................. 314
IRA Individual Retirement Accounts ............................................... 314
ROTH IRA Plans ............................................................................ 319
SARSEP ........................................................................................ 330
What is a SEP? .............................................................................. 335
Simple IRA and Distributions ......................................................... 337
Like-Kind Exchanges - Real Estate Tax Tips ................................. 345
US Government - Wealth Management Outlook ............................ 346
You Invest & Issues to Consider with Clients: ............................... 356
Sources and References ............................................................... 358
Wealth Management Career Information from the Dept of Labor .. 363
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Private Wealth Management Guide – George Mentz, JD, MBA
Nature of the Work About this section ...................................................363
Training, Other Qualifications, and Advancement ..................................366
Employment ...................................................................................................369
Job Outlook ...................................................................................................369
Projections Data ...........................................................................................371
Earnings .........................................................................................................372
Related Occupations ....................................................................................373

Guide to Financial Statements
The Basics
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Private Wealth Management Guide – George Mentz, JD, MBA
If you can read a nutrition label or a baseball box score, you can learn to
read basic financial statements. If you can follow a recipe or apply for a
loan, you can learn basic accounting. The basics aren’t difficult and they
aren’t rocket science.
This brochure is designed to help you gain a basic understanding of how to
read financial statements. Just as a CPR class teaches you how to perform
the basics of cardiac pulmonary resuscitation, this brochure will explain
how to read the basic parts of a financial statement. It will not train you to
be an accountant (just as a CPR course will not make you a cardiac
doctor), but it should give you the confidence to be able to look at a set of
financial statements and make sense of them.
Let’s begin by looking at what financial statements do.
“Show me the money!”
We all remember Cuba Gooding’s immortal line from the movie Jerry
Maguire, “Show me the money!” Well, that’s what financial statements do.
They show you the money. They show you where a company’s money
came from, where it went, and where it is now.
There are four main financial statements. They are: (1) balance sheets;
(2) income statements; (3) cash flow statements; and (4) statements of
shareholders’ equity. Balance sheets show what a company owns and
what it owes at a fixed point in time. Income statements show how much
money a company made and spent over a period of time. Cash flow
statements show the exchange of money between a company and the
outside world also over a period of time. The fourth financial statement,
called a “statement of shareholders’ equity,” shows changes in the interests
of the company’s shareholders over time.

Balance Sheets
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Private Wealth Management Guide – George Mentz, JD, MBA
A balance sheet provides detailed information about a company’s assets,
liabilities and shareholders’ equity.
Assets are things that a company owns that have value. This typically
means they can either be sold or used by the company to make products or
provide services that can be sold. Assets include physical property, such as
plants, trucks, equipment and inventory. It also includes things that can’t be
touched but nevertheless exist and have value, such as trademarks and
patents. And cash itself is an asset. So are investments a company makes.
Liabilities are amounts of money that a company owes to others. This can
include all kinds of obligations, like money borrowed from a bank to launch
a new product, rent for use of a building, money owed to suppliers for
materials, payroll a company owes to its employees, environmental
cleanup costs, or taxes owed to the government. Liabilities also include
obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the
money that would be left if a company sold all of its assets and paid off all
of its liabilities. This leftover money belongs to the shareholders, or the
owners, of the company.

The following formula summarizes what a balance sheet
shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its
liabilities and shareholders' equity.

A company’s balance sheet is set up like the basic accounting equation
shown above. On the left side of the balance sheet, companies list their
assets. On the right side, they list their liabilities and shareholders’ equity.
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Private Wealth Management Guide – George Mentz, JD, MBA
Sometimes balance sheets show assets at the top, followed by liabilities,
with shareholders’ equity at the bottom.
Assets are generally listed based on how quickly they will be converted into
cash. Current assets are things a company expects to convert to cash
within one year. A good example is inventory. Most companies expect to
sell their inventory for cash within one year. Noncurrent assets are things a
company does not expect to convert to cash within one year or that would
take longer than one year to sell. Noncurrent assets include fixed assets.
Fixed assets are those assets used to operate the business but that are not
available for sale, such as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said
to be either current or long-term. Current liabilities are obligations a
company expects to pay off within the year. Long-term liabilities are
obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock
plus or minus the company’s earnings or losses since inception.
Sometimes companies distribute earnings, instead of retaining them. These
distributions are called dividends.
A balance sheet shows a snapshot of a company’s assets, liabilities and
shareholders’ equity at the end of the reporting period. It does not show the
flows into and out of the accounts during the period.

Income Statements
An income statement is a report that shows how much revenue a company
earned over a specific time period (usually for a year or some portion of a
year). An income statement also shows the costs and expenses associated
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Private Wealth Management Guide – George Mentz, JD, MBA
with earning that revenue. The literal “bottom line” of the statement usually
shows the company’s net earnings or losses. This tells you how much the
company earned or lost over the period.
Income statements also report earnings per share (or “EPS”). This
calculation tells you how much money shareholders would receive if the
company decided to distribute all of the net earnings for the period.
(Companies almost never distribute all of their earnings. Usually they
reinvest them in the business.)
To understand how income statements are set up, think of them as a set of
stairs. You start at the top with the total amount of sales made during the
accounting period. Then you go down, one step at a time. At each step,
you make a deduction for certain costs or other operating expenses
associated with earning the revenue. At the bottom of the stairs, after
deducting all of the expenses, you learn how much the company actually
earned or lost during the accounting period. People often call this “the
bottom line.”
At the top of the income statement is the total amount of money brought in
from sales of products or services. This top line is often referred to as gross
revenues or sales. It’s called “gross” because expenses have not been
deducted from it yet. So the number is “gross” or unrefined.
The next line is money the company doesn’t expect to collect on certain
sales. This could be due, for example, to sales discounts or merchandise
returns.
When you subtract the returns and allowances from the gross revenues,
you arrive at the company’s net revenues. It’s called “net” because, if you
can imagine a net, these revenues are left in the net after the deductions
for returns and allowances have come out.
Moving down the stairs from the net revenue line, there are several lines
that represent various kinds of operating expenses. Although these lines
can be reported in various orders, the next line after net revenues typically
shows the costs of the sales. This number tells you the amount of money
the company spent to produce the goods or services it sold during the
accounting period.
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