Data on Tax Bill Issues (.ppt)

Four Steps Recommended to Minimize Downside Danger to Portfolios; Leading Advisors From Texas, Illinois and Iowa Raise Caution Flag.

WASHINGTON, D.C.///June 11, 2003///Three leading fee-only investment advisors from across the United States warned today that the new federal tax bill recently signed into law holds at least five major dangers for many investors and financial advisors. The financial experts outlined four steps investors and advisors can take to ensure their portfolios are not adversely affected.

The group of investment advisors, who are members of the Zero Alpha Group (ZAG), are: Savant Capital Managing Director Brent Brodeski (Rockford, IL); BHCO Capital Management Vice President Donald Harris (Dallas, TX.); and Foster Group Senior Planner Kent Kramer (Des Moines, IA.). The members of ZAG, a nationwide network of seven fee-only investment advisory firms, manage approximately $3.5 billion in assets.

FIVE PITFALLS FOR UNWARY INVESTORS & ADVISORS

The experts pointed to five major areas where the new tax laws could affect investor portfolios, including:

1. Investors with mortgages need to re-assess the tax benefits of their mortgage interest deduction. While for many people, this has been their single largest deduction, the elimination of the marriage penalty and reduction in marginal tax rates could cause the benefit of this deduction to be reduced or lost. In contrast, for some high-income individuals, the reduction of tax rates on capital gains and dividends might make an even stronger case for borrowing against their home equity to invest in a diversified portfolio of stocks.
2. VAs now a no-go? Variable annuities were once the darling of the financial industry, offering the best of investment and insurance, all rolled into one vehicle. Due to the tax law changes, their high fees, high surrender charges, and conversion of otherwise tax-preferenced capital gain and dividend income to ordinary income make variable annuities an absolute no-no for tax-watchful investors.
   
   "The new tax changes should be the final nail in the coffin for the variable annuity industry," said Savant Capital Management Managing Director Brent Brodeski. "The tax negatives of owning VAs, which were questionable products even before these new laws, now will nearly always exceed any marginal benefit of owning them. Variable annuities no longer have a place in a well-designed, tax-managed investment portfolio."
3. 529 plans no longer the "panacea" they were once thought to be. Reduced dividend and capital gains tax rates have, in most cases, eliminated the "tax-free" advantage from costly and restrictive 529 plans. Though in certain limited circumstances one can still benefit from such plans (i.e. if your home state offers a state tax deduction and you live in a high income tax state), most investors will likely realize higher after-tax and after-cost growth in tax-managed index funds or ETF's. Any 529 tax advantages will likely be consumed by higher costs, complicated restrictions and risky "tax-traps".
4. New gimmicks with hidden price tags. Like always, new slickly packaged investment vehicles and products designed to "presumably" save money, based on the new federal tax changes, will spring up like weeds in the coming weeks and months. Whenever investment laws change, seductive new products always hit the market with "guarantees" to save money for the investor. However, most of these new alternatives involve sky-high fees and often do not pan out as the "money-making machines" they are marketed to be.
   
   "Unfortunately, many investors are so committed to not paying taxes today that they wind up shooting themselves in the foot," said BHCO Capital Management Vice President Donald Harris. "What many people don't realize is that you usually have to consider a longer time horizon to accomplish effective tax planning. Sometimes it may be a prudent long-term decision to pay some minimal tax on investments in the short-term, in order to keep from paying a much higher tax down the road due to an poorly planned decision."
5. Knowledge gap leading to bad decisions. With the extensive new tax law changes, having a financial advisor with a full understanding of all the tax implications of various investments is now more crucial than ever. Decisions regarding investments made on the basis of stale or inadequate tax knowledge or other information could have costly tax implications for investors in 2003 and beyond.

FOUR STEPS TO ENSURE PORTFOLIO NOT AFFECTED

The three financial advisors offered the following four pieces of advice for investors looking to protect their investment portfolios from the pitfalls of the new tax laws.

1. Get a checkup and, if necessary, restructure your portfolio in the wake of the tax law changes. Investors should carefully engineer and coordinate the assets held among their taxable, tax-deferred and tax-free investment accounts. The delicate balance between various "tax buckets" is a tricky and sometimes nerve-wracking quandary for investors and tends to be best ascertained by a tax-savvy financial advisor.
2. Be even more cautious about actively managed investment vehicles. These products are more "tax disadvantaged" than ever. Such investments almost always mean higher tax penalties than passively managed index products. These "tax-sensitive" investments tend to offer the lowest burden for mindful investors. Additionally, the flurry of short-term trading seen in the 1990s can no longer be justified given the tax rate spreads between long and short-term capital gains.
3. Consider tax-efficient index funds and ETFs - the ideal alternative to costly and potentially tax-challenged variable annuities and 529 plans. The reduction in capital gains and dividend taxes make these low-cost vehicles naturally tax-optimal. Furthermore, unlike most tax-efficient investment vehicles, index funds are fairly immune from subsequent tinkering by tax-hungry politicians.
4. Diversify highly appreciated concentrated stock positions NOW. You could end up suffering from the "Enron effect." With the new tax law changes, it is even more important, and less costly, for investors to diversify their concentrated stock holdings. While it is tempting to hold onto highly appreciated stocks, it is risky and does not tend to be a frugal long-term decision. As many ex-Enron workers can attest, excessive reliance on the prospects of one core stock holding can have disastrous results.
   
   Foster Group Senior Planner Kent Kramer said: "The complexity of the new tax laws and the fact that many provisions have differing enactment and sunset dates make it even more difficult for individuals to effectively manage their investments without some professional guidance."

ABOUT THE EXPERTS

BHCO Capital Management, Inc., Dallas, TX. - BHCO Capital Management focuses on maximizing after-tax returns, while serving as a fee-only financial planning and investment advisory firm. With eleven CPAs on staff, they along with their sister CPA firm, specialize in income tax and estate planning as well as tax-efficient investing for high net-worth individuals and business owners. BHCO Capital Management is on the Web at http://www.bhcocapital.com.

Foster Group, West Des Moines, IA. Foster Group provides fee-only financial planning and investment advisory expertise. Foster Group developed the LifeWealth Financial Planning, Investment Management and Coaching systems to create integrated investment, retirement, estate and charitable giving strategies for individuals, families and organizations. Foster Group is on the web at http://www.fostergrp.com.

Savant Capital Management, Rockford, IL. - Savant Capital Management was founded in 1986 as an independent, fee-only financial advisory firm. Savant provides financial planning and investment advisory services to financially established individuals, trust funds, retirement plans, non-profit organizations and fiduciaries, using the firm's proprietary Wise Wealth Integrator and Wise Wealth Investment Solution processes. Savant Capital Management is found on the Web at http://www.savantcapital.com.

ABOUT THE ZERO ALPHA GROUP

Founded in 1995, the Zero Alpha Group, which is not an investment advisory firm itself, was created to serve as a nationwide network for seven independent fee-only investment advisory firms that manage approximately $3.5 billion in assets. Members of the Group are committed to providing objective, long-term private wealth management solutions to investors, focusing on asset allocation and a structured, quantitative approach to investing. The seven firms in the Zero Alpha Group network share a common philosophy about investing and client service - a commitment to passive, tax-managed investment strategies while providing an independent, fee-only financial planning solution for investors.

CONTACT: Patrick Mitchell, (703) 276-3266 or .