March 4, 2024

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Business is my step

Meet The Rebel Financial Advisor Helping Investors Save On Taxes

9 min read

Libra Wealth, the Los Gatos, California firm started not quite four years ago by CPA Mark Astornio, is giving stock pickers a run for their money by offering advice on tax maneuvers at a fraction of the cost.

Mark Astrinos is a 37-year-old CPA and former corporate auditor who only recently upgraded from a 20-year-old Civic to a used Lexus. Sounds unexciting, but he’s onto something. He’s got a wealth advisory firm that could really go places. Reason: Index funds are all the rage and prosperous savers are getting exasperated with stockbrokers who charge fat fees for managing portfolios.

Libra Wealth, the Los Gatos, California firm Astrinos started not quite four years ago, is giving those stock pickers a run for their money. Unlike almost all of them, Libra does not pocket a percentage of clients’ assets. Instead, it charges for the work done, more or less the way an accountant or, for that matter, a doctor or lawyer would charge. And it does work that would be beyond the skill level of most money managers. It comes up with ways to cut tax bills. That’s second nature to a CPA.

How did Astrinos land in this line of business? He is the first in his family to go to college. “My parents are immigrants,” he says. “My father said I should be a professional—accountant, doctor, engineer. Typical immigrant advice. He said you’ll always have a job if you become a CPA.”

Which is what happened, with Astrinos lining up an accounting internship at Deloitte while still an undergraduate at Santa Clara University. He started out doing corporate work. Supposedly, auditing was the place to be if you wanted a life, since tax work means 90-hour weeks in March and April.

But a decade ago he had a change of heart. He says, “People knew I was a CPA and at weddings and family functions they would ask me about taxes. I enjoy being analytical. I enjoy being able to help people.” So he left Deloitte to join a Bay Area firm advising wealthy clients about tax strategies. He opened Libra in 2017.

Libra’s clients are mostly prosperous types who work in or have retired from Silicon Valley careers—it doesn’t hurt that Astrinos’s wife works in technology—and it isn’t hard to sell them on the proposition that it’s easier to beat the tax collector than to beat the market.

Astrinos applies strategies like coupling Roth conversions to contributions to donor-advised funds, shuffling assets within families to reduce capital-gain taxes and taking advantage of an obscure tax holiday for investments in start-ups. Potential savings for a wealthy client: into the millions of dollars.

“Paying an advisor 1% (a year) to manage a portfolio? That’s not going to cut,’’ says Astrinos defiantly. “No longer can you be just a stock picker. Those people are a dying breed.”

Libra Wealth will charge a client with moderately complicated affairs and $5 million at stake a fee in the neighborhood of $25,000 a year. That’s slightly more than half what this investor would pay under a typical percentage-fee arrangement.

Spoilsport! The financial advisory industry lives on those asset fees, which typically start at 1% a year and get reduced above some break point like $3 million. For a money manager with a book of well-heeled clients, asset-based fees are quite the gravy train. If the idea of charging for financial advice by the hour or by the job catches on, the country’s 292,000 advisors are going to be on the defensive.

Those financial experts, of whom four in five work for brokers, banks, and registered investment advisors, function foremost as portfolio managers. They take you out of this stock or fund and put you into that other one.

The stockbrokers Libra competes with are well trained in picking securities, for what that’s worth (less and less, in an era of passive investing). But in the briar patch known officially as the Internal Revenue Code, they are at a disadvantage. Indeed, brokerage firms lard their websites with disclaimers about not giving tax advice.

The American Institute of Certified Public Accountants has approximately 4,000 members who have, like Astrinos, taken on the additional credential of “personal financial specialist.” The world is tilting in their direction. A few decades ago a money manager would have to know about municipal bonds and capital gains but not much else from the tax code. Now we have tax-advantaged charitable distributions from retirement accounts, reduced rates on some but not all dividends, arcane rules for employee stock options, 60-day IRA rollovers, the 3.8% Obamacare tax, income-related Medicare premiums, donor-advised funds and myriad other tax pitfalls and bonanzas.

“Paying an advisor 1% [a year] to manage a portfolio? That’s not going to cut it,” says Astrinos defiantly. “No longer can you be just a stock picker. Those people are a dying breed.”

Astrinos may be more affordable than a percentage taker, but he’s not starving. Although he won’t disclose numbers, it appears that Libra’s 70 clients will yield revenue approaching seven figures this year. That would be more than adequate to cover him, two deputy planners, an office manager and rent on two offices.

The asset-fee managers that Astrinos competes with are sitting, for now, on quite a gold mine. Cerulli Associates, a market analyst for Wall Street, calculates that $24 trillion is under professional management in retail channels. To estimate from the 0.86% average annual fee Morgan Stanley charges on it advisor accounts, that asset pile generates something like $200 billion a year of revenue.

In the business of shunning percentage fees, Astrinos has some company, but not much. Lyle Benson, a CPA turned financial advisor, charges hourly rates ($300 to $500) at his Towson, Maryland firm. Allan Roth, a corporate CPA turned financial planner in Colorado Springs, Colorado, gets $450 an hour. Mark Timothy Berg disavowed percentages when he opened Timothy Financial Counsel in Wheaton, Illinois, 20 years ago.

Berg’s thinking about percentages: “The consumer will say, ‘This isn’t right. If I give you $10 million instead of $1 million, get me to understand why I should pay 10 times more.’” Berg and his associates (one of them a CPA) charge hourly rates between $300 and $450.

That is the kind of planner you should hire, says Harry Sit, a California tech industry retiree who has created a part-time business locating financial advisors who bill by the hour: “If you want advice, pay for advice.” Hourly planners are sufficiently scarce that Sit is able to get $300 for delivering the names of three suitable ones to an investor. Forbes has an Hourly Planners List; we’ve been able to scare up only 140 entrants.

An hourly or flat fee may be quite a bargain if it buys tax expertise. Section 1202 of the tax code grants a federal tax holiday on long-term investments in a “small business” corporation. The investor has to get shares directly from the corporation (such as by exercising an employee option); the corporation can have no more than $50 million of assets at the time the shares are acquired, although it can be worth billions at the time the shares are sold; the shares must be held for five years. Tricky rules, but nicely matching the tech startups that populate Libra Wealth’s territory. The exclusion is good for the greater of $10 million or ten times what the lucky investor paid for his shares.

Lawyers, auditors and surgeons earn decent incomes, but they do not get a percentage of your net worth. How did it become customary for money advisors to do that?

Astrinos had a client with $15 million of “small business” shares acquired at a nominal cost who used irrevocable trusts to exempt not just the usual amount but the last $5 million as well. He doesn’t prepare tax returns, but he works with a client’s tax preparer and knows what questions to ask, what to look for in past 1040s and what to expect in the next year’s return.

“A lot of CPA tax work is in the rear view mirror,” says Astrinos. “Financial planning is a look at the future.”

Another Astrinos client, a man in his mid-60s, is sitting on $4 million in tax-deferred retirement accounts. The combination of Social Security payouts starting at age 70 and mandatory IRA withdrawals starting at 72 would put this fellow into a higher tax bracket. The defensive move is a sequence of Roth conversions over the next several years. These require upfront tax payments but insulate IRA money from bracket-boosting withdrawals. The conversions have to be astutely planned to keep from pushing the taxpayer’s current bracket higher.

One of the clients of Mark Berg, the Illinois planner, is selling a firm to an employee stock ownership plan. The complicated scenario involves Section 1042 of the tax code, permitting the seller to defer recognizing a capital gain if proceeds are invested in certain kinds of securities. Common stocks qualify but ETFs do not. The end game involves using some of those low-basis blue chips philanthropically. Would the average stockbroker be able to weigh in on this? Probably not.

Lawyers, auditors, surgeons and land surveyors earn decent incomes, but they do not get a percentage of your net worth. How did it become customary for money advisors to do that? There’s a history.

In decades past, the mere creation of a portfolio was a challenge. If you had a pile of money and weren’t prepared to micromanage it, you’d have to pay for investment advice. Either you gave up 1% a year to a Fidelity or T. Rowe Price for a mutual fund or you paid a broker 1% a year, or sometimes a lot more, via commissions and asset-based fees.

And then John Bogle (1929-2019) ruined that nice line of work. Now, not just his Vanguard Group but Fidelity, BlackRock and other vendors are mass-marketing index funds. BlackRock’s iShares Core S&P Total U.S. Stock Market exchange-traded fund has a 0.03% annual fee and earns most of that back by lending out securities to short-sellers. With this you get a professionally managed, extremely well diversified portfolio at a net cost of $50 a year per $1 million.

Or you can have a financial advisor pick stocks for you, at a cost 200 times as great.

Groping for a raison d’être, some money managers make quite a fanfare out of the simple matter of buying index funds. Allan Roth, the hourly planner in Colorado, recently took on a client whose previous advisor had him in 47 different funds, a lot of them ETFs. That’s silly, he says. It defeats the point of indexing.

Then there is the busy work of rebalancing— moving money from high-performing categories (stocks, say) into underperforming categories (like bonds). Nothing wrong with that, so long as your objective is merely to fine-tune a portfolio’s risk. (If you think it increases your expected return, you’re kidding yourself.) In any event, the activity is not worth much. Astrinos: “An algorithm can do that for a fraction of the cost and maybe do it better.”

The percentage guys are not doomed to extinction. They will adapt with creative menus that better match price to value, predicts Wei Ke, a partner at marketing consultant Simon-Kucher. Some advisory firms will offer varying fee levels with different amounts of hand-holding; some will offer monthly subscriptions for access to a planner; some will lower their asset fees but add a fee related to income.

As for the prospects for tax accountants, that depends. If Congress enacts a flat tax—not a prospect with Democrats about to control Washington—they’re in trouble. If it doesn’t, the advice from Astrinos’s father holds: Get a CPA. You’ll never be out of work.

Here, now, is advice to retirees and future retirees:

1. Before visiting a financial advisor, sketch out your own retirement portfolio on the back of an envelope. Four ETFs would be plenty. Copy the allocations from a target retirement fund and then use the Forbes Best Buy list to get the best deals.

Take this list to an advisor and say that you don’t want something more complicated or more expensive unless there’s a compelling reason.

2. Look at 12 Tax Angles For Investors: What Will Survive The Democratic Congress? Some of these 12 strategies are relevant to your situation. Your advisor should know about those.

3. Find an advisor who bills by the hour or by the assignment. You can go to Harry Sit or use the Forbes Hourly Planners list. © All rights reserved. | Newsphere by AF themes.