As Congress and the President return to the bargaining table in an effort to avoid going over the so-called "Fiscal Cliff", the knock-on effect of these protracted debates is creating uncertainty in the markets. Angela Raitzin, Managing Principal and head of the New York City office of Morton Capital Management, which manages $1.2 billion in assets for clients across the nation, spoke with Consulting One on One recently and offered her perspective on the changing landscape of investing, the impending Baby Boomer retirement explosion, and how investors can best weather the storm in light of new taxes and regulations that may be coming down the pike.
Consulting: Why is the capital gains tax increasing and who will be most affected?
Raitzin: There is this thing called sequestration, the idea is that the congress put into place something so terrible that hopefully no one would let it happen. Basically the Budget Control Act of 2011 puts into effect very dramatic changes to the U.S. budget. The idea is for Congress and the president to come together on an agreement to avoid the "Fiscal Cliff". The debt ceiling is an ongoing part of the discussion, it's unfortunate that the U.S. economy is in such a state that we've taken on more and more debt as our expenses have exceeded our revenue for quite a while now.
Consulting: You mention declining revenue—wouldn't increasing the capital gains tax be a source of revenue?
Raitzin: It's the law of unintended consequences. I don't want to turn this political, but Republicans and Democrats see fundamentally different consequences of their proposed actions. On one hand, yes, raising the capital gains tax would increase revenue theoretically, but as the independent Office of Management and Budget has indicated, there could be some very significant consequences as well. It's hard to see any one part of the discussion in minutia. You have to look at how all the pieces play together. You're unlikely to get just an increase of capital gains without some other actions taking place as well. I think there's a general sense that both revenue and expenses will change. We kind of divide the world into three areas: what we do know, what we think is probable, and what we don't know. Change is the thing we know is coming, I think what those specifics will look like is a big part of what's causing all the uncertainty right now.
Consulting: What are wealth management consulting advising clients?
Raitzin: The one thing Morton Capital is not recommending is what we call the tail wagging the dog. We don't advise our clients to make tax-driven trades. We look at individual investments on their own merits. We take taxes into consideration and want to be as tax-efficient as possible, but I think prematurely selling investments that are throwing off good cash flow because you believe taxes are going up on that tax flow may not be prudent. Where there is good cash flow, there's likely a healthy company. We're looking for companies that have good cash flow that are able to pay out dividends. Those are companies we think still belong in the portfolio.
Consulting: Assuming the capital gains tax does go up, how do you envision clients making different long-term investment decisions?
Raitzin: There are three big umbrellas we're discussing with clients. One of the biggest constraints is actually time. One thing we are discussing with clients is really a Roth conversion. If you have your IRA in a traditional sense, and you've never converted to a Roth IRA, we think this could be the right time to do it. That's definitely something we're discussing with clients. The kicker is that you actually have until October of next year to undo it if you decide it was the wrong step. There are very few times in investing when you get a no-harm, no-foul, so we think depending on a client's tax bracket this year a Roth conversion may make a lot of sense. The other thing we think will happen is on the estate planning side. We're talking to clients broadly about ideas they can execute. One thing that concerns us at this point is we're already in December, if you're not in front of a trust and estate attorney discussing options, it could be very difficult to get anything done before year-end.
Consulting: What's the outlook for the future?
Raitzin: The thing that's actually going to drive investment in the future and actually change how wealth management practices run and invest client money is more about the Baby Boomers. The 10,000 people a day retiring. I think that's going to have far more reaching consequences both for wealth managers, the financial services industry, what products are bought and sold, how people look at their wealth. I think the longer term issue for America is really going to be about the Baby Boomers. Boomers have been socking money away in their home, and in their retirement accounts, if at all, what effect that's going to have on home prices and buying decisions in the investment world are going to be seismic shifts in what the investment world looks like going forward.
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