“There is an art to science, and a science in art: the two are not enemies, but different aspects of the whole.”  —Isaac Asimov

“Rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance.”  — John C. Bogle

“Never buy anything from someone who is out of breath.”  —Burton Malkiel

Patrick Nolan, CAIA, Portfolio Manager – Private Markets  — At Gratus Capital, my role includes sourcing and screening investments, conducting due diligence, negotiating investment terms and monitoring performance of private investment opportunities.  In this post, I want to describe the process I use and share some interesting experiences I have encountered along the way.

Sourcing, Screening and Due Diligence

Due diligence is the research and analysis of a company or organization done in preparation for a business transaction [i].  Of the “investable universe,” select firms are identified as potential investment candidates.  Of these, fewer make it through a preliminary screening and are reviewed more deeply.  From the firms selected for review, only a small portion are selected for a full due diligence review.

I introduce this process to demonstrate that conducting due diligence according to a standard requires considerable effort.  After sourcing and screening, I use metrics to disqualify managers and judge the best from the rest.  I developed this due diligence process from my experience in institutional-level timberland and apartment investing.  In addition to my experience, I rely heavily on the Institutional Limited Partners Association’s (ILPA) [ii] sample Due Diligence Questionnaire and Chartered Alternative Investment Analyst Association publications.

According to Brown, Fraser and Liang, the cost of due diligence depends on a series of factors, including the time spent, the level of thoroughness and whether accounting firms, law firms, third-party service providers and consulting firms are used. These authors assume “a conservative cost of due diligence of $50,000 to $100,000 [per single institutional hedge fund allocation]” but contend that effective due diligence of funds in the selection of fund managers can generate alpha for an investor’s portfolio [iii].

I’ve heard that there is an art and a science behind any worthwhile endeavor.  Gratus’s due diligence process has a solid foundation in the “science” of private investing.  Having proper procedures in place is critical, but so is a focus on the spirit of the task.  Procedure must not cloud the goal of judging the worthiness of a manager and the overall attractiveness of an opportunity.  To demonstrate the two sides of due diligence, I’ll list some of the questions behind the “science” and then share the more interesting anecdotes that make up the “art”.

The “Science” of Due Diligence

Below are a few of the ILPA’s recommended BASIC questions for Limited Partners to present to Investment Managers:

  • Will Placement Agents be used during the fundraising process?
  • Were there any carry clawback situations in any of the Firm’s prior funds?
  • Are any investments in the Firm’s track record excluded from provided materials?

And a sampling of recommended DETAILED questions to an Investment Manager:

  • Describe any significant staff departures that are expected to occur between now and the end of the Fund’s investment period.
  • How will investment opportunities be allocated between active funds? Discuss any funds and/or separate accounts with potential allocation considerations.
  • During deal structuring, what is the process for integrating ESG-related consideration into the deal documentation and/ or the post-investment action plan? (ESG: Environmental, Social and corporate Governance)

In addition to 15 pages of similar questions, the ILPA goes on to provide multi-page templates for reporting portfolio investments, funds, professional references and team member biographies.  To top it all off, the ILPA ends with a list of 33 requested documents including Firm budgets, a list of LP secondary sales, and annual meeting presentations for the last 2 years!  Lastly, third-party auditors, custodians, accountants and investigators are suggested in order to triangulate and verify the subject’s response.  The result is a pile of information that may be erroneous or even fraudulent.  The process may create value, but it may also only create a false sense of security.

The “Art” of Due Diligence

Clearly the ILPA provides a road map for thorough institutional private investment due diligence.  The inclusion of third-parties to verify facts creates another layer of confidence.  But at what cost?  What resources are required of both the interviewer and interviewee to conduct such a review?  What great opportunities are missed if the ILPA is followed too closely?  Clearly there is a role for these questions if the investor is a public institution that is highly sensitive to any type of headline risk.  But many investors are not political targets with a large public presence.  Additionally, most investments only carry a small portion of the possible risks covered by the ILPA.  Common sense is in order.  Relying too heavily on the ILPA would be counterproductive for some investors’ task at hand.  This is where I value the “art” rather than the “science” of due diligence.  Below I’ve categorized some examples that capture the subtleties of properly evaluating a manager and a potential private investment.

Lack of Professionalism

  • What should you do when a manager is unreliable during the due diligence process?  Do they say they will do things and not follow through?  Can you responsibly trust a manager to conduct themselves professionally after they’ve been awarded your money if they are unreliable before they’ve received your money?  Better to pass on the relationship.
  • How should you approach an opportunity with incomplete information?  Many popular managers request verbal commitments prior to having finalized legal documents.  This tells me a few things: either they are well-seasoned and have numerous relationships or they are trying to pressure investors into a deal while withholding details. Verbal commitments with pre-existing managers is one thing, but making first-time investments with a manager that requires commitments prior to providing complete information is a bad idea.  Lastly, this may reveal that the manager’s clients have become complacent and are relying on the persistence of past performance. These are signs of a mature and well-worn strategy that may be better to avoid [iv].

Misleading Marketing

  • Sloppy marketing materials are a sign that the manager is likely sloppy in other facets of their business and possibly in their investment underwriting.  When I find marketing materials that specifically contradict or do not mesh with corresponding legal documents, I penalize accordingly.  While these mistakes are likely careless, they may also be purposefully misleading.  I don’t want to deal with a manager that is guilty of either.
  • I’ve come across managers that sell a popular trend, even when it isn’t entirely accurate. For example, one office manager suggested that a property was in the currently en vogue market of Nashville, TN.  Technically the property was a part of the greater metro-area, but it was 17 miles from downtown.  Not exactly an honest description.
  • I often see project-level returns in marketing materials.  This is clearly misleading, because clients will receive the performance net of fees and expenses.
  • Optimism is not a strategy.  I often see deals where the entire strategy is the assumption that past performance will persist or that there will be increased demand for the product in the future.  For me to become comfortable with a deal, I want to see a model with flat or decreasing demand, a.k.a. cap rate expansion.
  • “Cash-On-Cash” return.  What if you gave me $10 today and I gave you $1 each year for 10 years. Does that sound like 10% “Cash-on-Cash” return?  Or even worse, an average of 12.9% “Cash-On-Cash” return?  There are more realistic examples, but I see this line of reasoning often when managers quote “Cash-On-Cash” return.  The confusion stems from unreported losses, return of capital that is not income, or a reduction of capital account balance. Distributions are meaningless if you don’t know whether they represent income or return of capital.  Often, one cannot be certain until the asset is sold and fully realized. Solution: Ask for equity multiples and IRR returns.

Unattractive Terms

  • Conflicts of interest are sometimes unavoidable.  If they are small and are properly transparent, then conflicts of interest will not disqualify a deal. Three conflicts that I recently found were unnecessary and were a somewhat dubious effort to sneak additional fees out of the deal.
    • Fees based on Potential Rent.  Why not compensate on actual rent?  Potential rent can be set by the manager as a benchmark.  ‘Fees based on Potential Rent’ is synonymous with giving the manager a blank check.
    • Acquisition fees based on purchase price. This is pervasive in real estate, but I think it should be challenged more often.  Once a manager has client capital secured, they are actually incentivized to pay more for a property!  I don’t see this going away, but I also like to bring it up with managers and let them know that I do not like this form of compensation.  A better solution might be a percentage of equity, as this would incentivize the manager to balance the proper mix of debt and equity.
    • Fees on construction costs.  This is another perverse misalignment of interests, and managers should be pressured to seek compensation elsewhere [v].
  • Catch-up clauses.  I will try not to get lost in the details here, but catch-up clauses on carried interest are an additional layer of fees that managers often use.  I suspect that many investors do not fully realize the hidden expense of a catch-up clause.  Put simply, think of a catch-up clause as retroactively removing the performance hurdle after it has been achieved.  This is sometimes referred to as a soft hurdle (catch-up) or a hard hurdle (no catch-up).  Consider a 20% carried interest (often called the ‘promote’) and an 8% hurdle (often called the ‘preferred return’).  If there is a 13% return after management fees and expenses, then with no catch-up, the manger would receive 1% (20% of the return above 8%).  With a catch-up, the manager would receive every dollar from 8% to 10% in order to ensure that they receive 20% of all profits, and then 20% of profits from 10% to 13%.  This catch-up comes to 2.6%.  This equates to a 10.4% return for the LP investor instead of 12%.  This also means that the manager has less incentive after a gross return of 10%, because they’ve received most of their compensation already.
  • Lastly, how long do you want to be invested in a deal?  Managers say they will be out of a deal in 5 years, but when you ask for it in writing in the documents, sometimes they won’t agree.  If a manager will not put a 10-year maximum term on a 5-year business plan, then I have less trust in their business plan.  Managers often want full flexibility to hold a property and avoid selling into a poor market.  I’ve worked around this problem by agreeing on buy-out clauses.  In short, a manager’s legal documents should reflect the business plan.

In all, I hope this description relays my view of both the art and the science of private investment due diligence.  The science is certainly an important and necessary step in reviewing an opportunity, but thinking creatively is also important when seeking the best possible managers and investments.   As an alternative asset manager, we will continue to strive to bring both aspects of the process together for the long-term benefit of our clients.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice.  The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results.  In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses.  There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.  Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.


[i] Merriam Webster Dictionary defines due diligence as: research and analysis of a company or organization done in preparation for a business transaction.

[ii]  “The ILPA is the only global, member-driven organization dedicated exclusively to advancing the interests of private equity Limited Partners through industry-leading education programs, independent research, best practices, networking opportunities and global collaborations.  Initially founded as an informal networking group, the ILPA is a voluntary association funded by its members. The ILPA membership has grown to include over 400 member organizations from around the world representing over US $1 trillion of private assets globally.”

[iii] Hedge Fund Due Diligence: A Source of Alpha in Hedge Fund Portfolio Strategy

[iv] I have noticed this behavior in many apartment community investments.

[v] I often see these fees on projects sponsored by vertically integrated operators.

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No matter your position in life, whether you’re a business owner or retired and living off your assets, financial psychology plays an important role in building a financially sustainable and fulfilling financial plan.

The key question is, are your thoughts and behaviors regarding money causing you undue stress or exposing you to unnecessary financial risks?

Our guide explores these considerations by addressing many of the personality factors that impact individual investors’ financial portfolios and long-term retirement plans. 


  • An exercise to isolate your inherent tendencies and biases regarding money.
  • A questionnaire that isolates how money affects you and how you affect money.
  • Questions to ask yourself that help measure your appetite for risk. Is it time to reevaluate your thought-process?
  • Six behaviors that drive financial choices.

How is your personality affecting your financial plan? Find out.  Click here to immediately access your guide.

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This quarter we asked Gratus Capital Director of Investments Todd Jones, MBA, CAIA to weigh in on the current financial environment and critical market trends.

Here’s what Todd is talking about this fall:

The risks surrounding North Korea seem to be severe in consequence, yet the markets are generally not responding. What are your thoughts on the geopolitical aspects of portfolio management?

The North Korea risk can be viewed similarly to other geopolitical risks we’ve witnessed or continue to experience during the past nine years of this recovery, one example being the Iran nuclear crisis. The financial markets have already accounted for such events. Market trends tend to overlook rogue states, specifically countries posing threats to world peace.

For Gratus clients, these immediate geopolitical events tend to be less important because rogue states generally have a very little operational impact on the companies we’ve invested in. Interestingly, such event risks create short-term volatility, presenting us opportunities to rebalance as well as add to portfolio positions.

Also, it’s important to recognize that parts of an investment portfolio may benefit in the event of a geopolitical situation, such as a nuclear strike. The human fear factor created by such an event can spur flight-to-safety investment activity, specifically a spike in bond activity. Ultimately, this can positively impact many fixed-income investments.

The Federal Reserve officially announced its balance sheet reduction program. How will this impact markets?

Overall, our greatest concern has been that the reduction program would be too rapid, causing financial markets to get out of hand and spiral downward. Fortunately, this is not the case. Instead, the Fed has proceeded slowly and there has been no apparent or significant adverse impact on financial markets.

For some time, Gratus has believed that the long end of the bond market, typically 10 years and longer, would be minimally impacted by the balance sheet reduction announcement. Generally, bond markets are impacted by worldwide demographics, such as people living and working longer, which typically forces bond yields down.

However, the short end of the bond market has rallied and continues to move upward. In fact, in the next two years, the yield curve may become inverted. Unfortunately, recessions tend to follow such reversed trends. Also, equities are performing well and bond yields are increasing at a measured pace.

Fixed income assets need to be carefully monitored, which is why Gratus invests in short-term bonds or similar investments with floating rates. We continue to avoid investments residing in the middle to long end of the bond market. Keep in mind that U.S. bond rates are still relatively high, and continue to be attractive to international investors.

Overall, we don’t believe the balance sheet reduction program will be the unwieldy mess that many others are predicting. In fact, equity markets are likely to grow higher. However, sensitive interest rates could create challenges for REITs, utilities and telecommunication companies.

Key Consideration

If you’ve considered refinancing in the last two years, then now is a good time to revisit this issue. We believe the balance sheet unwind will cause disappropriate pressure on mortgage-backed securities and, by extension, mortgage rates. Therefore, it’s unlikely that rates will go any lower.

Where does Gratus stand on the active versus passive investment management debate?

Gratus believes there is room for both. However, it varies by situation.

For example, inefficient markets such as U.S. large cap stocks, passive management (also known as indexation) can make sense, such as investing passively in a U.S. large cap index mutual fund given the well-established enterprises that comprise the fund. However, passive management makes far less sense when investing in inefficient financial markets, such as U.S. small cap stocks, emerging market equities and bond markets. The complexities and speed of change associated with these markets support a more active investment management approach.

How does one choose between the two approaches?

At Gratus, we believe that passive management can work for individuals in the savings accumulation phase of life. Specifically, individuals who haven’t retired. However, for those retired and in the income distribution phase of life, an active management approach makes a lot more sense. Retirees typically have unique cash flow needs. An indexation-passive approach generally doesn’t account for these special needs simply by virtue of the way passive investments are constructed.

Passive Management & Robo Advisors

Recently, Robo Advisors and their passive investment management approach have been doing well for accumulators. Therefore, if you’re seeking to be extra hands off with your investing, a Robo Advisor approach could be effective. However, keep in mind that Robo Advisors have only existed during a bull market.

Remember, a passive index fund doesn’t care about price. Instead, it just buys the index including when the index is losing value.

What are your expectations regarding the upcoming holiday season and its impact on businesses?

As far as the overall economy right now and its impact on businesses, generally speaking, the news is good. This is evidenced by a buoyant housing market, positive GDP and low unemployment rates. Also, both energy prices and inflation continue to remain low. All of these factors lead us to believe that Q4 will be a positive outcome for most businesses. However, these factors don’t always translate to upswings in equity markets.

Globally, economies are in a synchronized upswing. In fact, it’s the first time in seven years that all regions of the world are doing well when measured by manufacturing and service activities. From our perspective, the economic expansion is likely to continue through the new year.

Authored By:

Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of October 2017 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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Dressed in funny hats, wigs, and red noses, 17 Gratus staff members spent an afternoon at Children’s Healthcare of Atlanta℠ Scottish Rite Hospital. Our aim was to put smiles on the children’s faces, and help them take their minds off their upcoming tests and surgeries.

Ultimately, our goal was to instill hope within each child as they face challenges caused by their medical conditions. Many of these young patients suffer from cancer, blood disorders, heart conditions, asthma, diabetes and other chronic medical conditions.

Games, Prizes & Smiles

Fifteen children ranging in age from four to 16 attended our carnival themed fun factory. Various play stations were set up, including face painting and tattoos as well as a variety of games, including darts, mini golf, knock-over-the-cans, and fishing ducks. Each child had the opportunity to win a variety of silly and unique prizes.

Throughout the afternoon, the Gratus team served cotton candy and popcorn in hope of minimizing, even momentarily, the stress the children and their families may be feeling.

Our team left the event in admiration of the courage required by such young individuals. We also learned more about how best to communicate with parents as each family dealt with their child’s difficulties in their own unique way. Many simply wanted to talk and we listened.

What to say to parents with a chronically ill child?

Sometimes it’s difficult to know what to say to a parent whose child is chronically ill. This article offers some excellent advice, spoken directly by the caregivers of chronically ill children.

For More Information

The needs of our greater community underscore Gratus’ purpose. There are many families among us who need compassion. Together we can make a difference in another’s life. To learn more about volunteer opportunities at Children’s Healthcare of Atlanta, visit their website. The hospital also has a Children’s Wish List.


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Gratus Capital has been named to  The Forbes ranking of America’s Top 100 Wealth Advisors for the second year in a row. Gratus Capital’s Founder & CEO Hank McLarty is listed 67th out of 100 top-performing peers. The Top 100 Wealth Advisors were selected from nearly 20,000 nominations and over 4,000 candidates invited to complete the Forbes survey.

The Forbes ranking of America’s Top Wealth Advisors was developed by SHOOK Research, a research organization focused on the quality of the advisor. It is based on advisor experience and an algorithm that measures both qualitative benchmarks gleaned through telephone and in-person interviews along with quantitative data. Specific factors that were examined include: revenue trends, assets under management, compliance records, use of team, client retention and best practices in working with clients.

“If we’re going to recommend advisors to the public, we have to make sure every advisor is high quality. When we meet with an advisor for a due diligence meeting, we are thinking to ourselves, “Is this someone we would recommend to a friend or family member?,” said R.J. Shook, president of SHOOK Research, about the ranking process in Forbes Magazine.

The full list of Top 100 Wealth Advisors will be featured in the October 24th print issue of Forbes magazine.

We have built our business by focusing on our clients and providing responsive, thoughtful, accurate wealth management counsel,” said McLarty. “We understand we have an opportunity to play a significant role in helping clients to achieve their dreams and plan for the future, and we make them our mission. We are honored to be recognized by Forbes as a Top Wealth Advisor again this year, as another testament to the value and level of service we provide.”

A boutique wealth management firm focused on serving successful individuals, families, foundations, and endowments, Gratus Capital caters to clients across the nation with a tailored team approach, low client to advisor ratio and fee-based advisory services.

What new financial goals do you have in mind? Contact us to learn how we can help.


Developed by Shook Research, Forbes ranking based on overall quality of practice and algorithm of qualitative/quantitative data received in nominations from professionals from financial services, banks, brokerages, custodians, insurance, clearing houses and registered investment advisers. Criteria included client retention, industry experience, compliance records, firm nominations, AUM, and revenue generated for firms. Seven years minimum advisors experience. 

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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Not so long ago, only the ultra-wealthy and large institutions such as banks and public pensions had access to alternative investment opportunities. Today, almost any individual investor has access to these versatile investment tools. However, the key question is, are alternative investments right for you?

Before deciding, let’s take a look at what an alternative investment really is and its potential impact on an individual investor’s financial portfolio.

According to the Huffington Post[i], alternative investments are investments in assets other than stocks, bonds and cash, essentially investments using strategies that go beyond traditional ways of investing. Gratus Capital Chartered Alternative Investment Analyst and Director of Investments Todd Jones, MBA, CAIA agrees.

However, Jones takes the definition a step further.

“At Gratus Capital, to be considered an alternative investment, the investment vehicle must not exhibit a correlation of greater than 0.60 to either the stock or bond markets in any rolling three-year period,” said Jones. “Otherwise, we exclude the investment from our universe of alternative investments when making selections for client portfolios. Alternative investments are meant to provide diversification and a unique income stream return. In fact, we don’t expect alternative investments to outperform the equities or fixed income markets. Instead, our approach is to identify alternative investments that, on average, have returns that are no greater than the equities markets and no lower than the fixed income markets.”

Jones also believes that almost every portfolio should include at least a small amount of alternative investments because of the diversification value typically generated by this asset type.

Legitimacy of Alternative Investments

“There has been a multitude of alternative investments entering the financial marketplace compared to just three years ago,” said Jones. “Individual investors should be very cautious. Roughly 95 percent of alternative investments available today engage in strategies that provide minimal benefit to a portfolio. Far too often the investment doesn’t perform as described, the return is too low, or the fees are too high.”

Types of Alternative Investments

There are many different types of alternative investments. Sang H. Lee of The Street offers the following examples:

  • Venture Capital
  • Private Equity
  • Hedge Funds
  • Real Estate Investment Trust (REITs)
  • Commodities
  • Real Assets: precious metals, rare coins, wine and art

Jones cautions investors who are contemplating alternative investments such as art, rare stamps, or wine, because the values of these assets are mostly driven by personal taste and sentiment. Instead, Jones recommends that investors focus on alternative assets that can be deeply analyzed: specifically, assets that have ample data to forecast valuations and output key metrics and trends.

Today, we’ll discuss three alternative investment strategies:

#1 – Interval Mutual Funds

InvestmentNews offers the following definition: Interval Mutual Funds[ii] are mutual funds that offer daily purchase for investment but liquidity for limited redemptions at specific intervals (usually quarterly). This change to the mutual fund structure creates large advantages: the fund can simultaneously invest in both private and public assets in a structure that has a liquidity feature and a daily net asset value. This allows the sponsor to create a portfolio of investments that may provide higher levels of yield and noncorrelation to equities, but without the illiquidity and lack of price transparency.

#2 – Private Equity

Financial news giant Investopedia provides the following definition: Private Equity[iii] is capital that is not noted on a public exchange. Private Equity is composed of funds and investors that directly invest in private companies or that engage in buyouts of public companies, resulting in the delisting of public equity.

Typically, private equity investments have been limited to large institutional investors or a person or organization that can allocate at least five million dollars to one single idea or asset. However, access to private equity investments is becoming more of a necessity for mass affluent investors, said Jones.


Recent news coverage of disappointing IPO offerings for private companies such as Blue Apron[iv] and Snapchat[v] is spurring other profitable private companies to remain private, limiting investment opportunities for investors.

“Now, quality companies that would typically go public early in their business lifecycle are remaining private much longer,” said Jones. “This is problematic for investors, since it limits investment opportunities, especially ones that substantially help an investor to diversify their portfolio.”

For Example:

Amazon went public in 1997. The company’s valuation at the time was approximately $300 million.  Today, it’s roughly a $300 billion dollar company. However, all the growth that has happened since Amazon’s public offering has led to massive investment opportunity and growth for individual investors, according to Jones.

With many large private companies retaining their private status, financial advisory firms are creating new opportunities for their clients.

“Back in 2013, Gratus Capital began formulating ways to gain access to private investment returns,” said Jones. “We began forming limited partnerships for our accredited investors, in order to gain access to existing private investments. This past June, we raised capital and closed our first fund that focuses on private debt and credit as well as private real estate. Our subsequent funds will more likely have a capital appreciation focus. We see these limited partnerships as a necessary evolution of our services if we’re to help our clients achieve targeted rates of return. Specifically, we’re seeking to access illiquid markets that are private and that generate above-average market returns.”

#3 – Hedge Funds

Hedge funds use pooled funds of underlying securities to earn returns for investors. According to Investopedia[vi], the most cited reason to include them in any portfolio is their ability to reduce risk and add diversification. Also, a hedge fund that provides consistent returns increases the level of portfolio stability when traditional investments are underperforming or, at most, are highly unpredictable.

BarclayHedge[vii] reminds investors that hedge funds are not currently regulated by the U.S. Securities and Exchange Commission (SEC). The financial research firm adds that hedge funds can invest in a wider range of securities than mutual funds can. While many hedge funds do invest in traditional securities, such as stocks and bonds,  they are best known for using more sophisticated (and risky) investments and techniques.

Choose Alternative Investments that Align with Individual Goals

BlackRock[viii] recommends investors choose alternatives that align with their distinctive goals. The investment giant gives four common objectives:

  1. To mitigate the effects of stock market volatility
  2. To lower correlation to traditional stock and bond markets
  3. To invest capital for a longer time frame in exchange for higher return potential
  4. To hedge a portfolio against inflation or rising interest rates

In Closing

At Gratus Capital, we believe that almost every financial portfolio should include some level of alternative investments specifically to sustain diversification and separation from the stock and bond markets.

Alternative investment strategies are not to be taken lightly, particularly when deciding between liquid and illiquid assets. Overall, it’s important to focus on what you’re seeking to achieve within your financial plan and how much risk you’re willing to take.

Alternative investments tend to come with higher risk; however, they can also come with greater than average returns. If you have questions about alternative investments or your overall lifetime financial plan, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.










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It’s expected that in 2017 more than 62 million Americans will receive roughly $955 billion in Social Security benefits.[i] The vast majority of these individuals need this income in order to afford retirement.

In this post, we’re seeking to help individual investors who don’t need Social Security income. Specifically, we want you to better understand how to value Social Security within your overall financial plan.

Medium to High-Net-Worth Individuals

You’ve been contributing to Social Security for many years, and even though you may not need the added income, it’s your right to collect it. Therefore, we’d like to outline some concepts for you to consider when contemplating the overall value and benefits of Social Security and how they factor into your life.

Even though you don’t need the money, there are some legitimate reasons to collect your Social Security benefits early, just as there are key reasons to hold off collecting until you’re age 70. Furthermore, some creative strategies for this excess income could make a tremendous positive impact on another life.

Here are 4 Concepts to Consider:

#1 – Supplement Income During Retirement

“When working with many of our clients, we tend to view Social Security as supplemental income to be used during retirement years,” said Kevin Woods, CFP® and Director of Financial Planning at Gratus Capital. “Even though you may not need Social Security given your sizable retirement savings, it’s important to value the benefits derived from Social Security income.”

For example, Social Security can be used to supplement health care and Medicare costs, provide investment income, pay for unexpected lifestyle needs, and to help with future expenses overall. “Social Security adds value to almost any financial plan, and it’s important to identify how this income will be allocated during your retirement years,” said Woods.

#2 – Redistribute Social Security Income

Let’s say you’ve grown your financial assets to the point that you have no real need to spend your Social Security income, yet you’re still receiving $2,000 a month in benefits. There are many beneficial ways to redistribute this income while helping others and enriching lives at the same time, according to Woods.

He cites the following examples:

  • Grandchild’s college education
  • Adult child’s first home or business
  • Alma mater
  • Irrevocable trust for special needs dependent
  • Loved one’s long-term care
  • Humanitarian and other Charitable Giving Efforts
  • Travel expenses for outreach volunteers

#3 – Reasons to Collect Social Security Early

“While your robust investment portfolio will likely cover your retirement expenses, there are generally three reasons to consider taking Social Security early,” said Woods.

These Include:

  1. Health
  2. Change in investment income
  3. Higher expenses early in retirement

However, there may also be a fourth reason to consider collecting Social Security early.

In a recent Kiplinger article[ii], Financial Advisor and CERTIFIED FINANCIAL PLANNER™ Professional Scott Hanson discusses the concept of “means testing” and suggests that high-income retirees may ultimately receive reduced Social Security benefits.  He writes, “One thing we know is that Social Security, in its current form, cannot continue forever. There simply aren’t going to be enough workers to pay for the benefits of all the projected retirees. Payroll taxes will either have to increase, or benefits will have to be reduced…or a combination of both.”

Hanson reminds us that for roughly its first 45 years, Social Security income was tax-free. However, as the years passed, laws were passed and wealthier individuals’ benefits were taxed.  The tax situation has also been compounded, given federal income tax increases.

Along the same lines, many of Woods’ clients believe that the Social Security system won’t sustain itself and, therefore, choose to collect their benefits as early as possible. Woods agrees that decreasing Social Security benefits for wealthier individuals is a valid concern and that collecting benefits early is a reasonable response relative to your individual goals.

For more information regarding Social Security means testing, read the AARP Public Policy Institute’s Reforming Social Security[iii] special report.

#4 – Reasons to Delay Taking Social Security

According to AARP[iv], the longer you wait to start collecting your Social Security benefits, the higher the amount you’ll receive.  The popular social welfare organization cites the following examples:

If you postpone collecting Social Security until your full retirement age of 66*, your benefit will be 25 percent higher than if you started as early as possible.  However, if you delay collecting beyond your full retirement age, then your benefit will go up eight percent a year until age 70, essentially equating to a 32 percent bonus.

In general, Woods recommends delaying your Social Security benefits until you reach age 70. A key reason is due to a frequent income earning disparity among couples, whereby one spouse has earned significantly more income over the years as compared to the other spouse.  By waiting, you’ll likely leave your surviving spouse in a stronger financial position.

For example, one spouse may be eligible to receive $2,500 per month in Social Security benefits at age 70, while the other spouse may only receive $1,500 per month.  If the greater-earning spouse passes away, the surviving spouse would receive the greater of the two Social Security benefits payouts, i.e., $2,500 rather than $1,500 a month.

Special attention should be given to the status of your health and that of your spouse when determining the best time to start collecting your Social Security benefits, said Woods.

*Your full retirement year is based on the year you were born.  To determine your full retirement year, consult Social Security’s Retirement Planner: Benefits by year of birth[v].

In Closing

Gratus Capital’s financial planning approach addresses complex wealth management issues faced by our clients.  And while many of our clients do not rely on their Social Security benefits to experience a financially fulfilling retirement, we believe that the value of this income should be included within every financial plan.  If you have questions regarding your Social Security benefits or any other financial, estate or trust planning concerns, please do not hesitate to contact us[vi].

Helpful Resources

Obtaining Your Social Security Online Statement[vii]

Social Security Estimator[viii]

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.










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Over the years, we’ve received many questions regarding Individual Retirement Accounts (IRAs). Typically, most investors want to know if they should choose a Traditional IRA or a Roth IRA.  However in reality, while there are differences as well as pros and cons for each, the key focus should be on avoiding the most common mistakes pertaining to IRAs in general.

Today, we’ll discuss five of the most common mistakes that we’ve seen.

#1 – Neglecting to Update Beneficiaries

Believe it or not, this is one of the most common mistakes individual investors make when it comes to managing their IRA, said Al Meadows, MBA, CFP® and Wealth Advisor with Gratus Capital.

“If you haven’t assigned a beneficiary for your IRA and do not have a will or trust established when you die, then the distribution of your IRA proceeds will be determined by the probate court,” said Meadows. “Also, many people are surprised to find out that beneficiary designations will override provisions in a will or trust agreement.  Unfortunately, I’ve heard of situations where someone’s hard-earned money went to someone they didn’t want it to go to, such as an ex-spouse still listed as the beneficiary.”

Meadows recommends revisiting your beneficiary designations for all of your investment accounts no less than once a year.  He adds that it’s particularly important to update your beneficiaries when there is a significant change in your life, e.g., divorce, death of a loved one, purchase or sale of a business, etc.

#2 – Roll-Over Mishaps

One of the key reasons an investor transfers their IRA savings is due to a change in employers.  In general, as long as you’re transferring your IRA retirement savings as a “directed distribution,” meaning from one trustee to another, you don’t need to worry about unplanned taxes or early withdrawal penalties.

However, if you request a withdrawal in the form of a check or direct deposit, you have only 60 days to roll this money into an IRA in order to avoid an early withdrawal penalty and additional ordinary income taxes.

Furthermore, if you receive a direct withdrawal of your IRA funds, keep in mind that the trustee is required to withhold 20 percent of your total IRA balance.  Why?  Because the IRS assumes that you’re keeping the other 80 percent (not rolling it over into another IRA account) and, therefore, requires the trustee to facilitate the withholding of your savings in order to pay the income taxes on the 80 percent that you retained.

If you do decide to roll over your direct withdrawal of 80 percent into an IRA, you must then come up with the other 20 percent in order to avoid the above penalties.  The trustee can’t distribute this money to you.  Rather, it will be reflected as a credit on your next income tax return, said Meadows.

#3 – Forgetting about Required Minimum Distributions (RMDs)

According to the IRS[i], you can’t keep retirement funds in your account indefinitely. Generally, you have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA or retirement plan account when you reach age 70-1/2.  Roth IRAs do not require withdrawals until after the death of the owner.

To determine your required minimum distribution, the IRS provides several different worksheets[ii].  The IRS adds that you can withdraw more than the minimum required amount.  Your withdrawals will be included in your taxable income, except for any part that was taxed previously or that can be received tax-free, such as qualified distributions from Roth accounts[iii].

“Sometimes investors forget that they have a small IRA tucked away somewhere,” said Meadows. “One time, when a new client came to me with 4+ million in assets, we discovered that he had a $100,000 IRA sitting in a self-directed account that he hadn’t touched in more than 20 years.  Since he was retired, we quickly accounted for his minimum distribution so that he could avoid any further unnecessary penalties.”

#4 – Over-Contributing to an IRA

According to Meadows, there are limitations as to how much you can contribute to a Traditional or Roth IRA each tax year.  Investors under age 50 may contribute up to $5,500 per year. Investors age 50 and older may contribute up to $6,500 each year.  However, how much you can actually contribute is determined by your income.  Also, tax deductions related to these contributions depend on whether or not you or your spouse are covered by an employer-sponsored retirement plan.

If you or your spouse are not covered by an employer-sponsored retirement plan, then refer to this chart to determine your tax deductions and income requirements.  However, if you or your spouse do have an employer-sponsored retirement plan, then refer to this chart instead.[iv]

#5 – Mindset & Emotional Mistakes

There are a handful of other IRA mistakes that Meadows has seen over the years, including mindset or emotional mistakes.

For Example:

  • Not starting soon enough – It’s never too soon to start saving for retirement. The key is to open an account now and set up an automatic deposit.
  • Not taking advantage of the “catch up” contribution – The IRS enables investors to contribute more to their IRAs when they reach age 50, up to $6,500. The extra $1,000 a year can truly make a difference for those reaching retirement said, Meadows.
  • Stopping contributions – Some investors think they have enough money already, so they stop contributing to their IRA. With increasing longevity and inflation, there really isn’t much downside to continuing your contributions, said Meadows.

In Closing

At Gratus Capital, we consider IRAs, 401(k)s and many other retirement savings vehicles to be key tools in building, diversifying and sustaining long-term wealth.  We encourage all individual investors to contribute no less than the amount your employer matches, and ideally more.  If you have questions about your retirement vehicles or other financial questions pertaining to financial, estate, insurance, tax and philanthropic planning or asset management, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.






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When one considers Dennis Rodman, what typically comes to mind are his off-court exploits – most notably his trips to the communist state of North Korea[1]. It’s hard to tell what Rodman is bringing to the table during these meetings other than something akin to being a court jester. But in this update, we’ll focus on Rodman’s on-court exploits and what he did for basketball teams he played for during the late 1980s and early 1990s.

What relevance does Dennis Rodman have to an investment portfolio? According to teammates and opponents, Dennis Rodman brought a valuable combination of defense and second-chance opportunities. In our mind, defense and second-chance opportunities in the NBA translate into investment portfolio benefits such as diversification, staying power, and optionality. We’ll discuss each of these concepts below, but the overarching concept is that all portfolios could use more Dennis Rodman.


We’ve written about the concept of diversification in recent publications as the S&P 500 has been one of the best-performing equity indices over the last eight years. There was a confluence of factors, to include stable currency, political stability, and savvy corporate management, that contributed to this positive outcome for US equities. Yet, as we sit here at the midyear point in 2017, the winds of change are blowing in favor of companies domiciled outside the United States. Consequently, in many alternative strategies we have implemented in portfolios, the correlation/diversification benefits are starting to become more apparent.

The crux of the argument relating to diversification benefits is seen clearly in the mathematics of a portfolio drawdown. We illustrate this concept below, displaying the return required to get back to even based on various levels of portfolio drawdown.

Essentially, if you can construct a portfolio in a way that reduces the drawdown by owning non-correlated assets, you allow the math to work in your favor.  We believe alternative assets/strategies are an effective way to mitigate portfolio risk.

Staying Power

This concept may be new to many clients but it is one that we’ve been thinking a lot about recently.  Staying power is a behavioral concept that has application to every long-term investment portfolio and refers to the idea that portfolios will either succeed or fail due to investor behavior during stressful market periods.  As we’ve all witnessed over the years, we know people who can’t handle watching their portfolio losing money.  How many people do you know that sold out of all their equity exposure during the financial crisis and haven’t repurchased yet, or they have only recently added it back while equity markets are at all-time highs?

All this being said, if a portfolio contains assets/strategies that are zigging when the market is zagging, an investor’s ability to remain invested in the “riskier” portion of their portfolio goes up dramatically.  This staying power could be seen in the win/loss record of almost every team Dennis Rodman was on over his career, due to the fact that Rodman was a master at keeping his teams in the game with both tenacious defense and rebounding.  These two traits took the pressure off the superstars that surrounded Rodman.  We believe that a properly diversified allocation to alternative assets/strategies has the potential to reduce pressure on the more volatile segments of a portfolio (typically equities) over a full market cycle.


Finally, we believe that all portfolios should be constructed with a degree of optionality.  Optionality is the flexibility a portfolio has to make changes or adjustments during significant stress periods in the financial markets.  The way in which most portfolios possess optionality is via a cash position.  Cash is said to have a high degree of optionality because the “price” of cash does not fluctuate and is readily accessible to redeploy in the event opportunities arise on very short notice.

Optionality is an important characteristic to have in a portfolio primarily because it allows investment decisions to be made without external influences.  For example, we believe investors like Warren Buffett and Seth Klarman have enjoyed success partly due to the fact that their portfolios carry a significant amount of cash (optionality) at almost every point in time.  In the case of Seth Klarman (via his investment vehicle Baupost LLC) the average level of cash over the last 30yrs has been 20%.  In the case of Buffett (via his investment vehicle Berkshire Hathaway) that cash level has been even higher!  The point in mentioning these levels is that both Klarman and Buffett have been able to succeed because they are almost always investing in opportunities based on merit.  Further, when they are making investments, they do not need to sell something to free up capital.  In this way, they are making only one difficult decision (what to buy) and not two (what to buy and what to sell).  Optionality is something investors should consider, as we currently find many equity and fixed income markets at extended valuation levels.

In summary, every team needs a Dennis Rodman, just as every portfolio could benefit from alternative holdings that generate a return that is different from traditional stocks and bonds.  While the benefits described (diversification, staying power, optionality) above may not be intuitive in the midst of an eight-year bull market, these benefits are invaluable during periods of significant market distress.  To that end, even though we have no way of knowing when the next significant downturn will come in the financial markets, that doesn’t mean we shouldn’t begin preparing for the next occurrence.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.


[1] In fairness, I cannot claim credit for the idea of correlating Dennis Rodman with alternative strategies.  That idea came from Chris Cole of Artemis Capital.  On the Artemis Capital website under “Market Views,” you’ll find a very interesting publication entitled “Dennis Rodman and the Art of Portfolio Optimization.”

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Most financial advisors advocate maximizing employer-sponsored 401(k) accounts or municipal 403(b)s. Generally, we agree. However, you could be missing out on tax savings if you aren’t careful.

Before going any further, let’s be clear on what we mean by tax efficient. According to Wikipedia, a financial process is said to be tax efficient[1] if it is taxed at a lower rate than an alternative financial process that achieves the same end.

The collaborative encyclopedia offers two tax efficient examples:

#1 – Passing one’s assets on to one’s heirs using a Grantor Retained Annuity Trust, for example, is potentially more tax efficient than simply letting the heirs inherit the assets.

#2 – An exchange-traded fund (ETF) that follows the S&P 500 Index generates fewer “taxable events” than a mutual fund that follows the same index.

Another Viewpoint

Financial educational portal The Balance[2] uses the term tax diversification and offers the following definition: Tax diversification is a financial term that refers to the allocation of investment dollars to more than one account type.

The Balance clarifies the term further by adding, “Tax diversification is similar to asset location (not to be confused with asset allocation), which refers to spreading investment dollars among various account types (the location of the investment assets) and choosing the best investment types that work best in those accounts.”

Tax Efficient or Tax Diversification

For the purposes of this post, we’ll use the two terms interchangeably, since they both seek the same end result. To help you more effectively evaluate tax efficient strategies, we asked Gratus Capital Director of Financial Planning Kevin Woods, CFP® for some advice.

Lack of Tax Diversification Negatively Impacts Retirement

“One of the reasons tax diversification is important for investment portfolios is due to the need to minimize paying taxes during retirement,” says Woods. “Keep in mind that if you place all of your money in tax-deferred investment vehicles, such as a 401(k) or Individual Retirement Account (IRA), you could end up paying more in taxes as compared to if you’d placed some money in taxable accounts today.”

Avoidable Yet Common Mistake

According to Woods, there are many people who only save for retirement using a traditional tax-deferred retirement account, such as an IRA, and never accumulate savings through an additional investment brokerage account.

“Placing all your money in tax-deferred retirement accounts imposes a built-in liability,” says Woods. “Essentially, a percentage of your retirement savings must go towards paying taxes.”

On the flip side is someone who invests in both traditional tax-deferred retirement accounts as well as other investments through a brokerage account. The investor who only saved using an IRA has to pay ordinary income tax on all of their withdrawals during retirement. Not true for an individual who saved using both an IRA and an investment brokerage account. This investor has a more tax efficient retirement portfolio, since he or she has saved their money in different types of investment accounts that have varying tax implications.

For example, the investor now has the ability to withdraw 50 percent from their IRA and the balance of what they need from a brokerage account and only pay taxes on what they withdrew from their IRA.

Detailed Scenario:

The White Coat Investor[3] provides a detailed example of two retired physicians who each draw $100,000 for the year from their financial savings vehicles. One physician placed all his money in a tax-deferred IRA account, and the other used a mix of tax-deferred and taxed accounts. Ultimately, the physician who used both tax-deferred and taxed accounts ends up paying less in taxes. The end result of the example is: One doctor pays an overall tax rate of 12.5 percent, while the tax-diversified doctor pays 1.9 percent.  

4 Different Tax Planning Investment Accounts

To build a tax-efficient investment portfolio, it’s important to distinguish among the four different types of investment accounts used for tax diversification, says Woods.

These include:

Taxed-Deferred (Pre-Taxed) – such as a 401(k) or 403(b). These vehicles are considered qualified investment accounts and have several benefits. Investopedia provides a simple explanation to help differentiate between qualified and non-qualified[4] investment accounts.

Why are tax-deferred accounts so popular? Woods isolates three key benefits:

“First, tax-deferred accounts enable you to lower the amount of income you pay taxes on now, increasing your take-home pay,” says Woods. “Second, since you’re deferring taxes until you withdraw funds during retirement, your investments grow tax-free during the years you’re making contributions. Finally, most retired investors are in a lower tax bracket as compared to when they were working, lowering their tax obligations when they begin withdrawing.”

After-Tax – such as a Roth IRA, Roth 401(k) or Variable Annuity. There are no upfront tax deductions when you contribute to these retirement accounts; however, you pay no taxes on withdrawals during retirement, and investment growth is tax-free.

“As a rule-of-thumb, if you’re age 55 or younger, a Roth 401(k) or Roth IRA makes sense to the extent that you’re not in the highest tax bracket,” says Woods. “Roths generally make more sense when you have more time to invest before retiring and you’re in a lower tax bracket.”

Taxable – such as stocks, mutual funds, bonds, CDs and money markets. Contributing to these taxable accounts means that you pay taxes each year on the dividends, interest and realized capital gains, rather than when you withdraw these funds during retirement.

Tax-Advantaged – such as municipal bonds or life insurance. These financial vehicles typically include a mix of tax-deductible, tax-deferred, and tax-free as well as other tax benefits.

Possible Diversification Strategies

“There are a number of strategies you can use with your portfolio management to strive for tax efficiency,” says Woods. “One approach is to have all your income-producing investments in your retirement account, thereby not requiring you to pay taxes on your interest each year. What’s more, you can also put all your stocks in taxable accounts, helping to provide a preferred lower tax rate on your dividends and long-term capital gains.”

In Closing

While saving for retirement may seem like a straightforward process, complexities arise when it comes to tax liabilities. “There are a myriad of variables to consider when trying to lower your tax liability both for today and during retirement,” says Woods. “I encourage all individual investors to seek the help of both a CPA and a financial advisor.”

Why both?

Because a CPA is an expert in tax laws and the tax preparation process, whereas a financial advisor is an expert at looking at an individual’s overall financial life. The latter includes financial and estate planning, as well as risk and investment management. Investors need both advocates to help ensure a tax efficient financial portfolio, says Woods.

Woods’ number one recommendation for investors, “Have more than just an employer-sponsored retirement account,” says Woods. “If that’s all you have, then it’s likely your portfolio is not tax efficient.”

At Gratus Capital, our team is made up of CPAs, MBAs and Certified Financial Planners. We believe that it takes a well-diversified skill set and team approach to ultimately guide individuals to financial freedom while lowering their tax burden. If you have questions regarding tax diversification or any other financial concerns, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.





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Gratus Capital, LLC
3350 Riverwood Pkwy, Suite 1550
Atlanta, GA 30339
Phone: (404) 961-6000
Toll Free: 1 (888) 707-0773
Fax: (404) 961-6020