To Cut Out Middleman, Advisors Recommend Intra-Family Loans

In this low interest rate environment, some planners are advising their clients to cut the middleman out entirely with intra-family loans. That way, "the bank's profit stays in the family," says Jonathan Bergman, an advisor in Scarsdale, N.Y.

In most cases, such loans are made to a child from a parent. A parent confident of a son or daughter's ability to repay can make a higher return through an intra-family loan than they often can through stocks or bonds. And, the younger generation is able to borrow at a lower interest rate than those offered by financial institutions.

First-time borrowing, financing business startups and the purchase of investment properties are all "ideal ways" to use this strategy now, according to Cameron Thornton, an advisor in Burbank, Calif., who specializes in inter-generational wealth transfers. He cautioned that the loans must be written using interest rates established by the federal government for short-term, mid-term and long-term periods to ensure the loan rates are not considered "under-interest" by the IRS.

Let Accounting Firms Handle Routine Advisor Exams

A Georgetown University professor has proposed a different idea in the ongoing debate over how investment advisors should be regulated effectively: Outsource the heavy lifting to accounting firms.

In a 36-page report now circulating through the industry, James J. Angel, a professor at the McDonough School of Business at Georgetown, says routine examinations should be outsourced to seasoned accounting professionals. TD Ameritrade Institutional commissioned the report, titled, "On the Regulation of Investment Advisory Services: Where Do We Go From Here?"

The SEC and FINRA habitually hire recent college or law school graduates as examiners, yet these examiners often lack industry experience, according to Angel's report. Audits then become perfunctory "check the box" events that are unlikely to uncover wrongdoing, according to Angel. It is better to end the practice of hiring examiners with little industry experience and instead upgrade the skills of existing ones, he says.

The November article "Unlisted REITs" misstated the return on capital to investors for Wells REIT II. It is an 8% per year cumulative, non-compounded return. The article also misstated the five-year returns on a hypothetical investment of $100,000. The return on capital after five years would have been $140,000, for an annual compounded rate of return of about 7%. An accompanying chart also did not accurately list the REIT's fees. Below is a corrected version:

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