One of the most common questions I get when doing personal coaching sessions is “what am I missing?” People often don’t know what to ask. Here are the most common holes I see in people’s financial situations:
1) Not having enough emergency savings. You’d be surprised by how many people have high incomes, expensive homes, large retirement account balances and yet little or no cash savings in case of an emergency. Perhaps it’s because the savings aren’t automatic like in a 401(k). However, you can just set up an automatic monthly transfer from your checking account into a savings account for emergencies. You may be surprised by how quickly it builds up to the recommended 3-6 months' worth of necessary expenses.
If you're panic about sacrificing retirement savings to save for emergencies, consider making that automatic transfer into a Roth IRA since the contributions can be withdrawn tax and penalty-free anytime and the earnings can be withdrawn tax and penalty-free after 5 years and age 59 ½. (Be aware that earnings may be subject to taxes and a 10% penalty if withdrawn before 5 years and age 59 ½, but the contributions come out first.) You can keep the Roth IRA in cash like a savings account or money market fund until you accumulate enough emergency savings outside and then invest the Roth IRA more aggressively to grow tax-free for retirement. In the meantime, having to fill out an IRA withdrawal form can deter you from dipping into it frivolously on non-emergency expenses.
Some people also hate earning so little on that money, especially with interest rates on savings accounts still near zero. If you have excess savings, you might consider I Bonds, which are currently paying 9.62%. Just be aware that you can’t cash them in the first 12 months, so you want to have sufficient emergency funds somewhere else until you’re past those 12 months. The interest rate also adjusts every 6 months based on inflation so they’re unlikely to continue paying that much indefinitely.
If you have an overfunded emergency fund, there's a case for keeping your emergency funds invested in a conservatively diversified portfolio for higher returns in the long run. Just be aware that if your emergency fund is the ability to borrow from your employer’s retirement plan, you could be stuck with taxes and a 10% penalty on the outstanding loan balance should you leave or lose your job and not be able to repay the loan. When you consider that unemployment is one of the main reasons for even having an emergency fund, that might not be such a great idea.
2) Having too much in company stock. This usually comes about by accumulating company stock in incentive or employee stock purchase plans combined with inertia. The problem is that it’s one of the most dangerous investing moves you can make since if anything were to happen to your employer, you could lose your job and a good portion of your nest egg at the same time. No company is immune from that risk no matter how much you believe in it. That's why an investment adviser can lose their license for recommending having too much in any one stock.
If you have more than 10-15% of your overall portfolio in any one stock, you may want to start paring it down immediately. Yes, you may have to pay some taxes or take a loss but those downsides pale compared to the potential risk. If you want to maintain some company stock, it's probably best to do so in your retirement plan since the growth can be taxed at lower long term capital gains rates if you withdraw the shares in-kind before selling them versus higher ordinary tax rates if you sell them and reinvest the money in something else before withdrawing it. This "net unrealized appreciation" strategy can be complex, and the IRS rules must be followed precisely so consult with an experienced tax professional before moving your retirement plan funds.
3) Not having an asset allocation plan. Asset allocation is considered the most important factor in determining the risk and return of your investments. Yet people often have a hodgepodge of accounts with randomly selected mutual funds. The problem here is that you can be under-diversified with 10 funds that all invest in the same type of investment or have one perfectly balanced asset allocation fund that is thrown off balance by adding another fund that is too conservative or aggressive.
You'll want to either make sure each account is properly diversified or look at your accounts as one (or actually consolidate them). The latter approach can also help minimize your taxes if you have a taxable account and prioritize your tax-sheltered accounts for investments that generate the most taxes like high-yield bonds, REITs, and high turnover mutual funds. For retirement accounts, you can simplify your life by consolidating them into your current employer's plan and/or an IRA unless one of those accounts offers a special investment option that you want and can't purchase elsewhere. If you don’t know how to create and manage an asset allocation strategy, you can follow a portfolio model or use a robo-advisor or investment professional.
4) Paying too much in investment fees. Many people have no idea how much they're paying in fees on their investments or even that they're paying anything at all. I can't tell you how many people have thought the only fee was a $30 annual maintenance fee on their statement. The real costs are more hidden in the form of mutual fund loads, expense ratios, and trading costs plus advisory fees that can all add up to several percentage points a year in lost returns.
That would be okay if those higher fees generated higher returns but there’s a lot of evidence that paying for active management just isn’t worth it. Instead of paying high management fees, consider passive index funds, which have been shown to beat the vast majority of the more expensive actively managed funds. Even those active funds that do outperform over a given time period have generally not been able to replicate that in the future. Perhaps that's why index funds have been recommended by legendary investor Warren Buffett.
5) Not running a retirement calculation. Are you saving enough? Many people seem to base whether they’re on track for retirement by how much they’re saving (I'm maxing out my retirement plan so I must be okay) or how much they’ve already accumulated (looks like a lot to me), but some people need a lot more than others to retire. The number depends on your time frame, income needs, and how much you’ll get from Social Security and other income sources. That's why the best way to know if you’re saving enough is to run the numbers on a calculator like this.
6) Not considering long-term care. Some people make a conscious decision not to purchase long-term care insurance. The problem is when someone thinks Medicare will cover it (it won't) or just doesn’t want to think about it at all. Medicaid covers long-term care costs, but you have to spend down practically all of your assets to qualify. As a result, you can do everything right in terms of saving and investing for retirement and see it all wiped away with a few years of long-term care costs.
Long-term care insurance can help protect your assets while providing more choices than Medicaid. It's generally recommended for people in their 50s to early 60s. Buy it too early and you can be paying for premiums for a long time before you need it. Wait too long and it can be a lot more expensive, or you may not even qualify if your health deteriorates.
You may also want to see if your state offers a long term care partnership program since purchasing a program in one of these plans offers additional asset protection even if you use up all the insurance benefits. With one of these plans, you can purchase just enough insurance to CYA – cover your assets. In any case, be sure to have a plan that goes beyond hoping you'll never need it (especially since it’s estimated that 70% of those turning age 65 will need some form of long-term care.)
7) Lack of estate planning. Almost everyone understands the need for a will and other basic estate planning documents and yet very few have actually put them in place. It may not feel urgent now, but you never know when you and your family will need them and by then, it will be too late. Family members may stress and even fight over key health care decisions even as they are powerless to manage your finances if you're incapacitated. Your death could leave decisions about who inherits your property and takes care of your minor children in the hands of the court and stick your heirs with unnecessary probate costs and taxes.
You can draft and store an advance health care directive for free at MyDirectives. Other basic documents like a will and durable power of attorney can be for free on sites like FreeWill, Fabric, and DoYourOwnWill.com and there are ways to avoid probate on many of your assets (depending on your state) without a trust. But if your financial or family situation is more complex, you may want to hire a qualified estate planning attorney.
Recognize any of those mistakes in your financial life? Consider consulting a qualified financial professional. Then see what they say when you ask “what am I missing?”
Bill hurry is the Founder and CEO of Keen Wealth Advisors and the Best-Selling Author of hurry on Retirement.
If you own a profitable business, one of the questions you’ll have to answer is what to do with your free cash flow. Many of the business owners I work with invest this excess capital back into their business because that’s the investment avenue they know the best. In a good portion of the cases, their hope is to one day liquidate the business and live off that pool of capital for the rest of their lives.
Preparing for a liquidity event involves more than just growing your business. You must ask yourself important questions to make sure your plan aligns with your preferred lifestyle and that the reality doesn’t fall short of both. We’ll unpack some of those questions in this article.
Determining The Sales Price
If you’re going to sell your business, you first need to make sure you have the right price in mind—and determining the right price begins with looking at your annual income needs.
Let’s say you’re currently living off $500,000 a year of income. Using William Bengen’s 4% rule as a rule of thumb, we can estimate that you’ll need to clear $12.5 million after taxes from selling your business to maintain your current lifestyle for 30 years. When I do the math with my clients who are business owners, many of them respond with, “I’ll just keep my business.”
They usually say this for a couple of reasons. The first is that they currently wouldn’t be able to sell their business and clear that sort of post-tax profit. They aren’t being offered the multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) they’d need to make the math work and keep their lifestyle going.
The other reason is they’re making good money off their business—far more than they’d be locked into if they sold and had to live off the proceeds the rest of their lives—and so it makes more sense to hold the business than sell, even if they’re offered 10 times EBITDA (or more) to do so.
Financial Factors To Consider
There were a couple of assumptions embedded in the logic above. The first is that you need to maintain your current lifestyle. This might not be true in your situation. You might have expenses (such as caring for your aging parents or your children’s tuition) that won’t be expenses for the rest of your life. Or you might be planning to up your expenses in retirement by traveling the world with your family, buying vacation homes or taking up an expensive hobby.
So therein lies an important question: What kind of lifestyle do you want once you’ve sold your business? And once you nail that down, how much will that lifestyle cost you per year?
Another assumption is that your pool of capital needs to last 30 years. You might be looking to sell later in your life and planning for your money to last 15 or 20 years, so the 4% rule doesn’t apply. Or you might want to retire at age 45 and need more than 30 years of income.
The final assumption is that the money is just to fund your lifestyle. If you want to do that and leave a sizeable inheritance to your children or grandchildren, or perhaps start an endowment at your alma mater, you’ll need to plan for a higher sales price than you get using the 4% rule.
A Third Option
Some business owners hold onto their business not just for financial reasons but because they can’t imagine walking away. Tension exists when that desire to stay involved clashes with their desire (or their family’s desire) to spend more time away from work.
So, another question worth asking: Is there a third door I can choose besides holding or selling the business? I’ve seen many business owners hire a president or COO to run the business while they step back. Others become the chairperson but maintain majority ownership.
Choosing this option gives them the best of both worlds. They can devote more time to their life outside of work and they remain involved with the business they love. It’s mentally stimulating and there might be tangible perks—like health insurance or a company car—to go along with the tax benefits that come with owning a business. Those perks can be hard to supply up.
Consider All The Factors
People sell businesses for many reasons. Some are ready to retire and enjoy the fruits of their labor. For some, the business is so demanding or stressful that it’s compromising their health and they need to step away. Others still have outside demands on their time that prohibit them from giving their business the attention it deserves. All these reasons are viable.
What matters is understanding why you want to sell your business—if, in fact, you do. After running the numbers, by yourself or with a financial advisor, you might determine you’re not financially prepared to liquidate the business. Or you might not be ready to step away.
A liquidity event is a big deal that requires thorough preparation both financially and emotionally. It can be hard stepping away from a business, especially one you started and grew. But by asking yourself the questions in this article, you can feel good about taking that step.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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The personal finance industry has improved its female-focused inclusion in recent years, but there is still work to be done. Whether it be one-on-one meetings where goals and priorities are not truly addressed or where a woman feels left out of the conversation, women report feeling as though they’re not receiving the same guidance they want and need from an adviser.
Nevertheless, demand is there. Findings from Fidelity Investments’ 2021 Women and Investing Study revealed that 77% of women believe if they had a financial adviser to help them invest, they’d be more confident about their financial picture.
My experience in wealth planning makes clear that every client, regardless of gender, has different wants and needs. I find clients are most comfortable contributing to conversations when all parties commit to discussing services, goals, priorities and dreams surrounding the client’s financial picture.
For those seeking to nurture or Strengthen relationships with female clients — and vice versa — keep these points in mind.
Female clients are not a monolith, and no two women are the same, but studies demonstrate trends women look for in advisers. According to Fidelity Investments’ Investor Insight 2020 study, women choose an adviser based on their reputation, expertise and personal characteristics. I like to shorten this to a “know, like and trust” relationship.
What do they know about their adviser? What do they like? What do they trust? Is there a personal connection in addition to a business relationship? Reputation and expertise play a significant role, but if a woman does not feel a connection with an adviser, the relationship will likely not be fruitful. In comparison, men tend to choose an adviser based on specific assets and services offered. Statistically, women are not more likely to choose female advisers over male advisers, but rather individuals who satisfy the key “know, like and trust” factors.
Women want their investments and planning strategies to tie in with their values. An adviser may explain the best asset allocation or supply advice on how the client’s portfolio should be structured, but unless they address how and why the complete financial plan is beneficial to and a reflection of her values, she may feel misunderstood or ignored in advising.
Getting to the root of the client’s values also opens the door for opportunities to educate them about their financial picture. For example, if a mother shares her priorities related to her children, she may be more interested in knowing how the investments and planning strategies benefit her family and children, as opposed to historical investment performance.
Many women want additional services to help navigate family dynamic issues, particularly regarding care for loved ones. Clients are often in situations where they’re caring for aging parents while simultaneously raising their own children. According to a recent Bank of America study on women and financial wellness, 58% of women who leave the workforce do so because of caregiving responsibilities. Working with an adviser to strategize care for a loved one will help mitigate financial and emotional stressors clients face.
Women also cite career coaching and salary/income coaching as services they find lacking with their advisers. For people who are still working, receiving feedback about how they can advance in their career or negotiate a salary to earn more money goes a long way in empowering them to advocate for their personal, professional and financial needs. Having this conversation and the others discussed here help build trust between the adviser and client.
As described above, men and women differ in the qualities they seek in an adviser. Because of this difference, men and women often ask different questions when interviewing potential candidates. Women often focus on relationship-based questions while men ask more service-based questions. Below are several helpful questions women (and men) can ask to gauge their relationship with an adviser and the types of services and resources they can expect to receive. These questions might differ based on whether a client is looking to choose a new adviser or continue with an existing one.
If a client is looking to choose a new adviser, she might ask various questions related to expertise, scope of service and the adviser-client relationship, such as:
These questions lay the foundation for developing a road map for success, and help clients gain a clear understanding of what their goals are and how strategic partnership with an adviser will provide accountability for those goals.
From the beginning of their engagement, advisers should start by setting goals and getting to know their client. For existing relationships, it’s important to revisit these questions periodically:
By prioritizing these introductory questions from the start, advisers can establish a stronger foundation of trust and understanding with their clients.
Advising couples has greatly evolved. Fidelity Investments recently reported that over 70% of millennial women now invest outside their workplace retirement plans. That percentage just five years ago was only about half that figure. It’s essential that advisers work to engage both spouses to create a comfortable and inclusive environment.
In many married couples, husbands often take the reins in investment conversations with advisers, but this dynamic is changing. Women are increasingly becoming the family breadwinners, and women control nearly 90% of household budgeting decisions. Women also statistically outlive their male partners and, therefore, are likely to be responsible for their financial health longer into their retirement years. Engaging both spouses encourages a balanced level of input and allows the adviser to develop a more comprehensive planning strategy with the couple — one that honors all parties’ wants, needs and values.
The industry has made strides toward more equitable conversations about women and finance, but there’s still much work to be done to foster environments that acknowledge and respond to women’s priorities and include them in decisions that ultimately impact their success and livelihood.
As advisers begin asking impactful questions and addressing both spouses when advising couples, women will be more equipped with the knowledge, tools and resources they need to ensure holistic financial planning is a meaningful, highly valued experience.
Managing Director – Wealth Planning, Waldron Private Wealth
Ali Swart is responsible for strategic leadership and management of Waldron’s Wealth Planning Team, focusing on providing a world class financial planning and client experience. In addition to her management and leadership responsibilities, Ali simplifies the wealth complexities for a select group of multigenerational ultra-high net worth families. Ali also leads Waldron’s Diversity, Equity and Inclusion endeavors, co-hosts the Wealth Simplified podcast, and has a passion for increasing financial literacy and awareness.
There comes a point in time when we reach an inflection point. Perhaps it’s a milestone birthday, a new baby…
There comes a point in time when we reach an inflection point. Perhaps it’s a milestone birthday, a new baby in the house, an empty house when the last child goes to college, a divorce, remarriage, or even the passing of a beloved family member or cherished friend that spurs the realization that having professional financial advice would be valuable.
However, many people do not take the next logical step for a variety of reasons:
— They do not know how to find a competent and capable advisor.
— They are afraid they have waited too long to start financial planning.
— They are embarrassed because they do not understand financial terminology.
These fears are valid. Fortunately, because they are also common, financial advisors will work hard to make you feel comfortable from the first meeting. The initial meeting is truly a conversation to determine if you have compatibility with the advisor and for the advisor to have a clear understanding where you are today and where you want to go financially.
Finding an Advisor That You Like
While the recommendations you will ultimately receive are important, finding an advisor you like and trust is paramount. When an advisor asks you insightful questions and truly listens to your needs, your confidence in implementing their recommendations soars. Advisors also recognize that there are specific behavioral styles around money and may ask you to complete a profile to determine the compatibility of your individual styles. This is especially important if you have a spouse or partner involved, so that all partners feel heard and respected.
The easiest way to learn about advisors in your area is to ask friends for referrals to theirs. You can also ask your other trusted advisors, such as your CPA or attorney, for recommendations. Don’t hesitate to interview each advisor before choosing to see if there is the appropriate professional chemistry. And don’t be afraid to walk away if you feel even slightly uncomfortable with them.
The first meeting’s timing and agenda will vary by advisor. Some advisors want to dive deep into the conversation around your goals, fears and concerns and supply you plenty of time to ask questions. Usually, this meeting is scheduled for about an hour. Others will schedule a longer initial meeting with the goal of moving forward immediately if you agree with their style and investment philosophy. There is not a right or wrong approach; it really comes down to the advisor’s business preferences. However, if you do not feel compatible with the advisor, you do not have to continue the meeting for the full time period.
The majority of advisors will hold the appointment at their office. Video calls, such as Zoom, are becoming more common for additional meetings, but the initial meeting is important to do in person so that you can assess chemistry, and the advisor can observe your body language. The latter is important as you may not yet have the confidence to speak up about sensitive courses which can impact the overall success of your planning. The astute advisor may ask further questions or simply make a note to circle back as your relationship with them develops.
It is important to bring your spouse or partner to this meeting if the planning involves them. At the office, staff will likely direct you and any others to a conference room and offer a beverage to enjoy before the advisor arrives. Take note of how welcoming the staff is toward you, too, as you will likely work with the entire firm, not just your advisor.
If you are working with a registered investment advisor, or RIA firm, the firm is also required to supply you a packet of documents detailing the fees you will pay and what services you will receive for that fee. If you do not understand the fee structure, good advisors will encourage you to speak up and ask questions. The documents will also cover a variety of courses like conflicts of interest, cybersecurity and succession plans. It is important to read it fully.
Worried About Starting Planning Too Late
As the greetings conclude and the initial paperwork exchange begins, people often become nervous about their starting point. Rarely do people start their financial plans exactly when it is optimal. Planning for the future is a big project; career and family needs are unrelenting. However, this is one of the most immediate values that a planner can bring to the table — helping you start and holding you accountable to your actions.
Initially, the advisor will ask a lot of questions about what steps you have taken and where you want to go. By necessity, these questions are personal and may feel intrusive. Feel free to ask why they are important to the conversation. Examples of typical questions include: “What is most important to you?”, “Do you want to pay for your child’s entire college experience?” or “How do you envision your retirement years?” An insightful planner will dive deeper at times, which is why having confidence in them early is critical.
In order to successfully travel from Point A to Point B, it is important to define both clearly. Many advisors will supply you a list of important papers to bring to the meeting. These may include pay stubs, bank statements, brokerage account statements, retirement plan documents and insurance policies. They will also need to know how much you owe in mortgage and car payments, credit card debt, student loans and other debts. Business owners will have similar documents pertaining to their structure and operations.
All these documents will help the planner supply you a snapshot of your personal starting point, including:
— Balance Statement – Determines your net worth, which is the difference between all the assets that you own outright and those that you still owe money. It will also help the advisor understand the liquid assets currently available to invest toward your goals.
— Cash Flow Statement – Defines exactly how you much you bring home each month and how it is being spent or saved. A cash flow statement is important because it will help determine how much you can safely spend and still invest to meet your goals.
Additionally, your planner will need to understand your risk tolerance for various kinds of investments. Some people are ultra conservative, while others have the stomach to take significant risks. Therefore, you will be asked to complete a small set of questions to help clarify your risk profile.
Financial Literacy Is Not Required
There is a lot of jargon in the financial industry, as well as words that are commonly used, but not always well understood by people. When you’ve been brave enough to step up and begin achieving your goals, it is important to continually ask questions about anything that is not clearly explained to you — until you are certain you understand the topic. Relationship-driven advisors are comfortable with explaining a concept more than once and asking you to repeat it back to them, in your own words, to confirm clarity. This is your money, your goals and your decision to pursue any recommendations that the advisor may make.
Closing the Meeting
By the end of the first meeting, you should walk away with an understanding of your current Point A, clarity around your Point B and, most importantly, whether you have trust in the advisor’s knowledge, experience and demeanor. You should have a good feeling as to whether this advisor is right for you and your needs. If you choose to move forward to a second meeting, the advisor will typically provide an explanation of what to expect next. Best of all, you will feel confident that you have the tools to make informed decisions with your partner in this journey.
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What to Expect From a First Meeting with a Financial Advisor originally appeared on usnews.com
Friday, August 5, 2022
Non-fungible tokens were minted and sold under the radar until a relatively obscure artist sold an NFT for an immense sum. That seminal event invigorated interest in NFTs by artists, sales platforms and collectors. In this column, we undertake to identify and answer, in Q&A format, the top forty legal issues associated with this new medium of artistic expression.
How does copyright law apply to NFT art? NFTs do not change the operation of copyright. The underlying work is protected by copyright, which can be retained by the author or transferred to the holder of the NFT. This is similar to how a copyright in a conventional piece of art may be transferred to a third party. That said, copyright transfers must be in writing, and whether a smart contract is a writing for purposes of the Copyright Act is not a settled legal issue.
If the sales platform mints an NFT of digital art, does the smart contract need to specify who owns the copyright? Yes.
If a platform wanted to display an NFT image for public viewing, would the platform need the permission of the copyright holder, the owner of the NFT, or both? The answer will depend upon the terms associated with the NFT. A typical allocation of rights would be that the platform would need the permission of the copyright holder in the underlying work and not the permission of the owner of the NFT, but that allocation could change with the terms of the NFT. An artist could license the artist’s rights to a work exclusively to the NFT owner, which would require the platform to obtain the owner’s approval in order to display the work.
What are the risks of NFT minting? The answer might depend on who is minting the NFT. The creator could mint the wrong NFT, or could input the wrong content or omit information, and not be able to change any of this afterward. If a platform is transferring an NFT that has already been minted, then there could be risks associated with the transfer (hacking, theft, counterfeiting, etc.). If the platform creates its own blockchain and mints NFTs to that blockchain, then there could be technical or structural risks.
If the platform mints the NFT art, will the art appear as having been generated by the artist, the platform, or both? The answer to this requires scrutiny of the smart contract deployed to mint the NFT. Typically, most marketplaces will require that participants mint only original content or content in which the participant has rights. If minting another’s work, the participant could add information about the artist.
Will the NFT be held in the platform’s wallet? The answer will likely depend on how the transaction is structured, as well as the smart contract deployed for the transaction. There might be tax consequences associated with temporarily holding an NFT.
What is a smart contract? A smart contract is a computer protocol that digitally facilitates, verifies and/or executes the performance of a “contract” protocol.
Can a sales platform add terms to the NFT that govern how the sale will be conducted on the platform? Yes, it is common and recommended to impose terms applicable to the NFT purchase to affirm the legal enforceability of the protocol in the smart contract.
How does one embed a smart contract into the blockchain? Typically, a smart contract is deployed as a program on the blockchain, which is usually the Ethereum blockchain).
Could one settle a payment in fiat currency (rather than crypto currency) via smart contract? Answering with reference to currently available technology, the answer is probably not, because fiat currently payment settlements are recorded on private ledgers rather than on the blockchain. One could have the smart contract record on a distributed blockchain ledger, and then record that information in a traditional private ledger.
How would a smart contract handle a notyet-determined sales price? Smart contracts define rules and automatically enforce the rules through their deployment. As long as the rules are programmed into the protocol, and the smart contract ingests accurate data, the smart contract deployment will produce a certified output. Smart contracts also can be crafted to communicate with other smart contracts, which may increase the output possibilities. The platform’s product development team should work with commercial lawyers versed in blockchain technology to assure that their smart contracts align with the parties’ legal commitments.
If the platform is paid cash by a buyer, then how can the platform reconcile that payment with the automatic royalty embedded in a smart contract? Most likely the platform would need to include the confirmation cash payment as an input in the data feed to the smart contract in order to trigger payment of the royalty via the smart contract.
What is a sales agent’s role in a smart contract where the platform does not mint the NFT and the smart contract already exists? This would depend on the protocol for the smart contract. One could program a smart contract to supply the platform the temporary holding of an asset as an intermediate step.
If the sales platform does not mint the NFT or if, after minting, the NFT is not transferred to the platform, how can the platform be sure that title will transfer to the buyer? An NFT will not transfer payment to the seller until title to the NFT is transferred to the buyer on the blockchain.
Does the platform need to take title in order to transfer possession? No. As in the case of physical goods, the platform can conduct the sale process, notify the seller and the winner of the result of that process, and the seller can transfer the NFT to the buyer. The platform does need to have, however, the contractual ability to force the seller to fulfil its obligation to transfer possession.
Can a platform possess an NFT without owning it? While it is possible that an NFT could provide this capability in its terms, that would be highly unusual.
One reason why a sales platform takes possession of physical art is to make sure that the seller doesn’t sell it to someone else. Is there a way to do this without taking title to the NFT? An NFT can have only one owner at a time, so the only way to be sure of avoiding the classic “double spending” risk is to own the NFT. That said, there may be other, better, ways to achieve this goal; e.g., by contract with the seller or the use of escrow accounts to ensure transfer by the seller.
Can the platform add to the blockchain that the platform was involved in the sale as agent without taking title to the NFT? Yes. The platform can become part of the NFT’s provenance in this way.
Is there any need for a platform to consider compliance with securities laws, commodity laws or banking laws with respect to its role in the transfer of funds in the sale process? Yes, but, depending on how the transaction is structured, it should be possible for the platform to avoid these issues by involving third parties that possess the correct regulatory qualifications. Because of unmanageable regulatory burdens, the platform will rightly wish to lawfully avoid characterization of its activities as securities brokerage or exchange operation or a money service business.
Are you sure about that? We heard that NFT art is a ‘utility token’ and that the SEC has no jurisdiction over utility tokens. SEC jurisdiction is unclear and the consequences of being secondguessed by the SEC are severe. Calling a token a “utility token” does not make it one. The function rather than the label is what matters. Consult with expert legal counsel.
What are the anti-money-laundering laws and related issues that pertain to NFT sales? The Global Financial Action Task Force published guidance in March 2021 that has an impact on decentralized finance markets and NFTs that should be considered. Some of the key AML considerations for a platform relate to enhanced regulations in the US, EU and UK that expand AML requirements to dealers in art and antiquities. In addition, the platform should be considering the application of such regulations to crypto assets, exchange providers and wallet providers. Under these enhanced regulations, activity involving exchange, security, and utility tokens are brought within the AML rules. From a regulatory standpoint, this may include obtaining appropriate registrations and making required disclosures and interfacing with the applicable Financial Intelligence Units. From a compliance standpoint, this may include the development of policies and procedures (including Know-YourTransaction and Know-Your-Customer Procedures), risk assessments, training, suspicious activity investigation and reporting. As noted above, it is possible in some circumstances to avoid these sorts of obligations by partnering with an entity that has all the correct licenses and does all the necessary checking.
What warranties on NFTs should a sales platform provide? Platforms will want to minimize the warranties that they will make. If there is a warranty, it should be procured from the consignor, the creator or other providing party, as applicable.
What warranties related specifically to the NFT should a platform obtain from a seller? Warranties of title, authenticity, and continuing existence of the digital image, as well as non-infringement, and other standard warranties in the sale of goods, especially for art pieces and collectibles, should be procured from the seller.
Can the identity of a buyer of an NFT on the blockchain be kept confidential? There is no reason why a seller or a buyer cannot maintain the confidentiality of her, his or its identity, but so far most NFT marketplaces maintain the right to require an entity to prove its ultimate identity even while permitting the entity to transact business confidentially on the platform.
How should the platform address artist-imposed future resale royalties (to the artist) in its sales agreements and conditions of sale? NFTs that provide for future resale royalties will automatically pay out future resale royalties to their creators when they’re sold. Royalty systems differ for each marketplace, though, such that this issue needs to be reviewed on a marketplaceby-marketplace basis.
Is this part of the NFT software code, such that any future buyer contracts to pay the artist the royalty? A transfers within the same blockchain will trigger a payment from the buyer to the artist.
Does the platform need to get involved in collection of these royalties or enforcement of the terms? No. It’s automatically handled by the blockchain.
How does an artist know when a transfer has occurred and thus a payment is due to the artist? Because the artist is identified in the NFT, notification to the artist (and payment) is automatically handled by the blockchain.
How would the platform handle the royalty if the winning bidder paid in fiat currency rather than crypto currency? Initial sales will not incur a future resale royalty. If the platform brokers a “secondary market” sale within the same blockchain, then payment of the resale royalty should happen automatically, without the need for the platform to get involved. A buyer desiring to use fiat currency to make a purchase would need to deposit that money into a suitable crypto wallet to make the purchase.
If the NFT is transferred to the platform before sale, will that trigger the resale royalty or any other conditions in the NFT? What happens if there is no sale? The answers will depend on the conditions coded into the NFT, but it would be unusual for a transfer not to trigger conditions. Unless a separate agreement with the original NFT holder was negotiated, the platform would incur the condition obligations, even on no sale, if the NFT were transferred to the platform’s wallet.
What commercial laws apply to the sale of an NFT? There are significant uncertainties about what substantive law will govern the sale. UCC Article 2 governs only sales of tangible property. Digital art is not tangible. Courts sometimes apply Article 2 by analogy, but even then most provisions of Article 2 can be overridden by express contract terms. The alternative to Article 2, in the United States, is state common law, which again can largely be overridden by express contract terms. Furthermore, courts applying the UCC and the common law have increasingly applied principles of good faith, fair dealing, conscionability and commercial reasonableness to avoid results that seem (to the particular court) unfair or harsh. This suggests that sale contracts in the NFT art area should be drafted with extraordinary specificity and reasonableness.
Technologically speaking, what could happen that might require an NFT art sale to be unwound? Because the Ethereum blockchain is decentralized, it’s highly unlikely that there will be a total shutdown of the platform. Possible counterfeiting or hacking of smart contracts or wallets are genuine concerns. As with any work of art, we would expect that the principal concerns of a buyer would be that what it purchased was not the authentic, original work, or that multiple originals were or could be created. The usual supposition is that blockchain technology precludes these problems, but we would advise not indulging in that supposition in view of the rapidity of technological developments. We counsel protection against these risks.
For example, can the NFT be corrupted? This is a computer engineering question, not a legal one. The uniqueness of each NFT is said to be incorruptible, but again we counsel caution.
What happens if the platform that possesses the NFT files into bankruptcy? There are multiple risks associated with a platform going bankrupt. For example, a bankruptcy court could find that the NFT is or is not “property of the estate,” depending upon the applicable contract language between artists and the platform, with consequences either way. A court could also face challenges with valuing the NFT to the extent the platform requires debtor-in-possession financing throughout the case, which could put the platform at a disadvantage when negotiating with the DIP lender. The murkiness surrounding valuation can also pose challenges to claims valuation and administration. Finally, given the opacity of the NFT market and the court’s likely unfamiliarity with it in general, it is possible that a bankruptcy filing would subject the platform’s directors, officers and other key principals to greater scrutiny than they would experience in a typical bankruptcy proceeding. Several platforms have gone into bankruptcy. Cred, Inc. is one that is currently in bankruptcy proceedings. Some of these risks can be managed by careful drafting of the sale contract. One bankruptcy risk of grave concern in this situation is that the bankrupt site’s obligations to the buyer could be deemed “executory contracts” that could be rejected in the site’s bankruptcy. Of note, licensees of copyrights are not given the protection against such treatment that the Bankruptcy Code gives to licensees of other types of intellectual property.
What are the mechanics of NFT sale cancellation? To delete an NFT, one would “burn” it to remove it from the blockchain. But this would remove the NFT entirely. If a sale were to be cancelled while preserving the existence of the NFT, then, if the new owner has already been recorded, one would need to execute a “cancellation” on the blockchain (potentially via smart contract) in order to change the record of ownership. This is primarily an issue to be dealt with in the terms of the contract.
If a buyer pays a USD purchase price in ETH, and if the sale is cancelled three years later and if ETH has become worthless, how will participants account for the change in value? We would draft the contracts such that the seller would be obligated to return the sale proceeds in the fiat currency of the relevant sales jurisdiction in an amount determined by using the exchange rate prevailing at the time of sale.
In the event of a dispute over the NFT, does the blockchain nature of NFT art mean that the current owner can pursue the artist rather than the sales platform? If the buyer is given cancellation rights, or warranties, then the contract should state precisely what the remedy will be. But under common law principles there could be questions about whether the remedy provided for is “reasonable,” particularly in these circumstances.
Can a sales platform’s terms and conditions of sale protect the platform from possible involvement in a dispute over the NFT? There are two scenarios to consider here: Either (1) the platform facilitates a transaction over an existing, public blockchain (e.g., Ethereum) or else (2) the platform uses a proprietary blockchain that it has created. In the former case, the platform is only tangentially involved and carefully drafted terms and conditions can limit its liability, likely making it immune from disputes about an NFT. In the second case, it is unlikely that the platform would be able to fully avoid being drawn into a dispute over an NFT minted on the blockchain, since it created the blockchain. Even in the latter case, though, it is likely that the platform’s liability would be limited to structural issues pertaining to the blockchain.
What role does insurance play with respect to the sale of NFTs? Insurance coverage opportunities for NFTs will develop over time, but it will be bespoke coverage or no coverage for the near future.
Should a platform expand its liability insurance for risk of loss to the NFT as it usually would do with conventional art? No. We expect that the platform could eliminate or significantly reduce its liability for loss because there’s no tangible object and because the risk of loss due to custody issues should be minimized or eliminated through the use of blockchain -- or at least we would credibly argue that it is eliminated.
We hope that our answers to these forty legal questions will be useful to artists and to platform developers and operators, but this FAQ is not legal advice to anyone. As is evident from the variety of legal questions arising in the fledgling NFT industry, not one but several fields of law are implicated: copyright law, commercial law, technology transfer, securities, commodities, banking, insurance, tax and other specialties. Artists and platform teams should engage teams of legal counsel who are experts in these fields -- and who also are experienced with crypto assets -- to advise them regarding their particular circumstances and plans.
© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 217
The Labor Department recently published a notice of its intent to propose new regulations regarding classification of workers. The notice did not provide detail about what the regulations would contain, but this is another installment in a long-running debate about whether workers should be deemed employees or independent contractors (ICs).
The percentage of IC representatives registered with the Financial Industry Regulatory Authority has increased considerably over the past 10 years, so this is an issue of some importance to financial professionals. Contrary to popular belief, workers are not necessarily free to determine whether they are employees or ICs. That question is answered by applicable law and regulations.
Worker classification affects both workers and employers. Employers are required to track the working hours and conditions for employees, pay overtime wages in some cases, and make contributions to Social Security and other worker benefit funds such as unemployment and workers’ compensation funds on their employees’ behalf.
In many cases, employees are also entitled to employer-paid health insurance and to participate in employer-sponsored retirement savings plans. But worker classification is not just an economic issue. Employees are often subject to restrictions on how, when and where they perform their work. They owe their primary loyalty to their employer and may be prohibited from contracting with more than one employer at a time.
How does a financial professional square this with their desire to supply clients the best and most comprehensive advice?
Worker classification is covered by many laws and regulations at both the state and federal level. A primary source is the Fair Labor Standards Act, which was adopted by Congress in 1938 as part of the New Deal. FLSA was intended to protect workers and established standards for wages, overtime and other working conditions. FLSA, however, generally applies only to employees, and includes provisions to determine if individual workers are employees or ICs.
This has evolved into what is called the “Economic Realities” test, which consists of five elements.
In 2020, the Department of Labor adopted amendments to the Economic Realities test to place greater weight on two of the five factors:
Most independent financial professionals work where, when and how they wish. They find and develop their own client relationships, offer the products and services they choose, and have the ability to establish relationships with multiple providers of products and services to create the best solutions for their clients.
We ask the buidlers in the blockchain and cryptocurrency sector for their thoughts on the industry… and throw in a few random zingers to keep them on their toes!
This week, our 6 Questions go to Tongtong Bee, co-founder of Panony — an incubator, investor and adviser for blockchain and Web3 business.
I’m Tongtong Bee, the co-founder of Panony and founder and editor-in-chief of PANews. I started my professional journey as a journalist at China’s traditional news outlets, including China News Service, Jiemian and Cailian Media Group. Since 2015, I’ve been covering blockchain and fintech news as one of the few journalists in China to focus on these sectors at the time.
My focus on economic issues and emerging technologies led to me being selected to report on the “Two Sessions” (NPC and CPPCC) in 2018. And that’s the year my business partner Alyssa and I started PANews. We’ve published over 20,000 articles with an average of over 5 million page views per month, became a frequently cited source in crypto and blockchain journalism, including Forbes, Caixin, CCN, and we’re an official news source of Tencent News.
I have to say Bitcoin. Being a journalist hurry on economic research, I got blown away when knowing about its concept for the first time.
Bitcoin is designed to be a substantial step forward in making money more secure, as well as a significant deterrent to many types of financial crime. It is the first decentralized peer-to-peer payment network driven by its users with no central authority. Bitcoin now has changed the world and will continue revolutionizing the financial systems in many countries. It remains the creative outcome in all of its present and limitless future uses.
Being part of Panony and PANews, we always feel excited to meet and work with hundreds of brilliant, innovative projects worldwide. For example, I’m personally intrigued with what they’re doing at Cudos, a decentralized cloud computing platform. We know that the cloud is pricey and centralized. In addition, up to 50% of the time, the hardware is inactive or switched off, resulting in low return on investment for enterprises and an enormous carbon footprint. Thus, the current development trajectory is unsustainable for the planet.
The Cudos network, using its cloud-based distributed computing approach that includes blockchain support, allows organizations to save up to 10 times more than centralized hyper-scale cloud platforms and hardware owners to offset (and potentially profit from) the cost of their hardware by renting out their computational power to the network.
The blockchain industry can be exuberant. I’m glad there are plenty of talents out there building a better future together.
Good question. The decentralized web is the unstoppable future of the internet.
In the current version of the web, also known as Web2, people can’t overlook the results of big corporations controlling what happens online: personal data being tracked and sold without our permission, loss of power for our contents, being dominated by ads… Most of the web is centralized. Web3, which seeks to drastically reimagine how we design and interact with apps from the ground up, will fix many of these issues. There are a few fundamental differences between Web2 and Web3, but decentralization is at the heart.
The Ethereum network is currently the largest decentralized network, with access to thousands of decentralized applications. With a focus on digital ownership, the earning potential for content creators and the inventions of new ways to invest has increased. And in a decentralized web, individuals can control their data, not some mega corporate or anybody else.
As a winter game enthusiast myself, my memories of the Beijing 2022 Olympics are still fresh! Eileen Gu winning two gold medals and one silver at a single game is surely a free ski sensation. Not just watching her beautiful moves is jaw-dropping; I also admire her constant efforts to inspire girls. I’m also honored to have made the Forbes China 30 Under 30 in 2020 with her (different list)!
As a female entrepreneur, I admire her spirit of sticking to goals, challenging the status quo, pursuing dreams with passion and constant hard work. It gave me strength when my business partner Alyssa and I started our business together.
I really wish I don’t need to sleep so I can do more things that interest me. I would probably read more books because I always find it fascinating to get to know something new. During the two-month lockdown in Shanghai, I grew out of a habit of indoor badminton exercise and will keep on doing that, doing it properly outdoors.
I’m super grateful that my husband and I share many hobbies, and one of them is to write a book together on advertising in Shanghai. We’re also quite interested in making documentaries for Chinese folk artists and hope the world could see them one day.
We envision the future of social media is owned by content creators, communities — not certain platforms that control the narratives. This is what Web3 brings us. Decentralization could be the blueprint for the future of social media: Users could have direct access to the decentralized platform; no centralized authority can dictate the rules of engagement and monetization; social media will become a freer space while also granting content creators full ownership of their assets.
Decentralized autonomous organizations (DAO) are a novel way for online social organization that will have far-reaching implications. Properties of DAOs are likely to have an enormous impact on the business of social media. Blockchain tokens have the potential to change that arrangement by allowing creators to monetize their fans using many of the same methods that DAOs use to reward their members for contributions.
We have seen pleas from users that Twitter could have the potential to shift the power balance and to be transformed into a Web3 platform. We’re also grateful to see some of the projects, including Only 1 and Rally, are committed to reshaping social platforms and rebuilding the social and creator economy.
Our community needs more builders who have a warm heart and a cool brain. Less FOMO, more patience. And confusion is good: It makes people think of themselves.
The time has come to update my thesis on the company Gerdau S.A. (NYSE:GGB), a business in the steel sector. In my previous article on the company, I called the company a relatively risky play given some of the credit rating deficiencies as well as some of the geographical risks and macro.
As I've mentioned before, investing in companies in Brazil is always a bit of a risk due to currency and potentially volatile markets - though it's equally dangerous to completely overplay these risks and ignore the market and individual company valuations entirely, as some investors want to do.
When looking at Gerdau, it's important to remember positives as well as challenges. There are plenty of positives that make Gerdau a convincing play if you're prepared to consider the risks.
This is an investment-graded Brazilian steel producer with expansive international operations and 40-50 years' worth of experience. Whatever challenges the modern world and its market can think to throw at individual companies - Gerdau has seen and experienced them firsthand, especially being in a relatively volatile geography such as Brazil.
Being a family-controlled company also brings with it some of the upsides - as well as downsides of such a venture, including a lack of shareholder control, but a highly vested interest in things like the dividend.
Still, commodities such as steel, as with other commodities like aluminum, copper, and other metals, are bound to have certain upsides in the market environment we're now clearly entering. These investments tend to hold their levels far better than some other sectors, given the relative pricing power of the companies.
Some basics first - as I mentioned in my first article on the company, steel as a sector has a high correlation to population and industrial growth, which is why the market for it has been very lucrative for the past two decades or so. China has seen explosive demand due to its bubble in Real estate, and while China may be on its way down, there is still a high continued demand for steel. Gerdau also produces within one of the most appealing steel geographies in the world, with Brazil being the 9th-largest producer worldwide of steel. This also isn't an easy sector to be in, which is why we've seen such a degree of consolidation over the past 20-40 years.
Steel in other parts of the world hasn't seen great trends, on a company-wide level. Companies that exemplify this include Mad Men-known Bethlehem Steel Corporation, Trico Steel Co, National Steel Corporation, LTV Corporation, and others, many of which were folded into ArcelorMittal (MT). Only the largest and most efficient producers, or producers found in low-cost regions end up remaining in this sector.
Of course, this is actually a potential positive for Gerdau, together with the current macro. This is because Gerdau can produce cheaper than most of its peers, and given the current trends, it's unlikely that this will change in the near term. This has granted the company some positives over the past few quarters, and its transformational journey is ongoing.
2Q22 results are in - and these results are good despite current issues. While higher Brazil inflation and worldwide macro heighten the risks. The company is seeing a slowdown in China due to COVID-19 restrictions. There was also a pricing decline with trends in Turkish rebar, raw materials, as well as scrap and pig iron prices. These prices have essentially corrected somewhat.
Still, shipments, sales, EBITDA, net income, and margins are all up.
The company recorded the best quarter in history for the company's NA division, meaning 42% of consolidated EBITDA. The company saw very healthy dynamics in industrial and infrastructure trends as well as construction, with leading indicators pointing to even stronger growth thanks in part to accelerated infrastructure spend. This doesn't take away from the logistical and labor challenges the company is seeing, but it's still projecting a very strong steel demand, with a large order backlog. The US infrastructure bill should start seeing its first effects by the end of 2022, or early 2023.
The special steel segment is seeing some impressive growth as well.
Brazil saw impressive trends as well, with increasing trends and good outlook. Volumes are at stable levels, and the company expects continued upside from residential and energy sectors, with plenty of demand from the infrastructure sector.
South America ex-Brazil meanwhile had the best quarter in history and expects continued upside from both Argentina and Uruguay, with continued stability and demand from Peru as well. The company managed over R$3B of FCF in the quarter, or a 14% net sales margin for the quarter. This is also the 9th consecutive quarter of positive FCF, with the 2nd lowest financial cycle for 2Q in the last 10 years.
This also puts the leverage at 0.18X, which is the lowest leverage ratio ever recorded by Gerdau.
The company has an average debt term of 8 years, with a 7.6% average weighted cost. This might sound high from an EU/NA perspective, but it's not that high for the context the company operates in.
The company is also in an excellent position to continue its generous dividend policy, coupled with excellent shareholder buybacks.
All this puts the company in a superb position.
I highlighted in my previous article that the company is currently in a part of the cycle where it is performing with a very high RoIC, meaning that most of the other corresponding key variables are also positive. I do go into some fundamental risks in my original piece...
- The iron/steel market is inherently volatile, best expressed by viewing this company's earnings and sales over time.
- The Brazilian Real (R$) is not exactly known as the most universally stable currency, and over 50% of company earnings come from Brazil. The company's FX exposure is massive. Nor is Brazil inherently known as the most geopolitically stable region, with plenty of ups and downs.
- While the company's current debt level seems low thanks to high earnings, genuine total debt is relatively high. With a high cost of capital and a historically low ROCE compared to a relatively high WACC of well over 9% at this point, the company has had a hard time, outside of this crisis, really driving shareholder returns. This is a problem, and not a small one.
(Source: Seeking Alpha article, Gerdau)
I will continue to argue that some of these risks have grown smaller as the company has been granted ample elbow room to address its genuine debt with the advantage of massive earnings - enough to make share buybacks.
I will also go on record saying it's difficult to say when exactly the problematic macro situation, characterized by high demand and inflation, is likely to wind down or to end - but that the company is appealing here - and the appeal at this point, with the company's recent quarterly, is getting even higher.
Since my last article on Gerdau, the company has dropped close to 15%. That brings the valuation to the following situation.
This does not take away from an extremely volatile earnings history, but the fact is that over the past 20 years, the company has clearly outperformed broader markets, coming in at an over 12% annualized RoR. What's even better, the company shows no indication of being grossly overvalued as they did prior to the 2007-2009 financial crisis.
Gerdau is, in fact, extremely undervalued at this juncture. The current valuation has the market putting Gerdau at no more than a 3x P/E, which is ridiculous for this company.
There is the matter of the company's earnings being elevated for 2022 still, but I don't see the company being worth this little. After a 15% drop-off, Gerdau has become incredibly appealing, now trading below $5/share. I actually shared this in my last article - that the company becomes a "BUY" at $5/share, and I'm now backing this stance with cash injections.
I put the company at the lowest possible 20-year average of 12x P/E, then dial this down to 8.5x P/E, which is still lower than most peers in the entire industry. The upside here is 36% until 2024, even in the face of double-digit genuine declines.
This is a perfect example of a SOTP/NAV valuation being an argument for investing. 5 out of 6 analysts have this company at a current "BUY" or "Outperform" recommendation, and I finally believe the price to be low enough for me to start taking more of an active role in the shareholding of this business.
Gerdau will be my second South American holding. I intend to start small - then build up size step-by-step, as I don't see this company moving massively in either direction quickly.
There is no doubt that Gerdau is a well-established company in several markets. There is also no doubt that Gerdau trades to significantly cheaper multiples on virtually every basis compared to peers at this time, with some exceptions.
My previous points made about the peers remain - all of them are tendentially better capitalized than Gerdau is, and any investment into Gerdau needs to deal with the fact that 50% of the company's EBITDA in fact comes from Brazil, which again isn't exactly stable geography by any means.
There are safer alternatives out there - I still believe and see that. However, given the shift in macro, we're seeing, I'm now willing to pay tangible book value for the company, which means that I might be willing to start to look at Gerdau at around or below $5/share, which is a fairly significant bump from my recent price target for the company of around $3/share.
That's why the company is now a "BUY" for me. My stance on the company is now a "BUY".
My thesis for Gerdau here is the following:
Remember, I'm all about:
Thank you for reading.