Harmonious Efficiency = Private Placement Life Insurance
When the elements of a transaction are balanced it produces Harmonious Efficiency. This is exactly what is achieved for the assets of wealthy international families in a properly constructed Private Placement Life Insurance Policy (PPLI). PPLI is a product that dates back to the 1980s, so you are not employing something that was invented yesterday. Life insurance regulations and laws are also well-established and relatively straightforward in most countries throughout the world. PPLI provides a balanced approach to structuring assets that does indeed produce Harmonious Efficiency.
We have chosen two examples of Harmonious Efficiency that are analogous to PPLI. The basic tenants of the Efficient-Market Hypothesis (EMH) are set forth below. From the world of retail sales we give you an example of how a novel approach to selling a product created Harmonious Efficiency.
Harmonious Efficiency implies that all parts of a structure fit together and work toward solving a client’s financial aims. These aims are stated most succinctly in the six elements of Expanded Worldwide Planning EWP. (Please see Wikipedia International tax planning for a complete explanation of the six elements). They are:
- Asset protection
- Succession planning
- Tax Shield
- Compliance simplifier
- Trust substitute
We quote from the Principles section of the Wikipedia article:
“Foreign Account Tax Compliance Act (FATCA) and CRS. At the heart of EWP is a properly constructed Private placement life insurance (PPLI) policy that allows taxpayers to use the regulatory framework of life insurance to structure assets along the client’s planning needs. These international assets can also comply with tax authorities worldwide. EWP also brings asset protection and privacy benefits that are set forward in the six principles of EWP below. The other elements in the EWP structure may include the client’s citizenship, country of origin, actual residence, insurance regulations of all concerned jurisdictions, tax report requirements, and the client’s objectives.
Planning with trust and foundations frequently offer only limited tax planning opportunities whereas EWP provides a tax shield. Adding a PPLI policy held by the correct entity in the proper jurisdiction creates a notable planning opportunity.”
Trying to understand the stock market has challenged many to produce come theories that explain its behavior. One of them is the Efficient-Market Hypothesis (EMH). We quote from the Wikipedia page on this subject.
“The efficient-market hypothesis (EMH) is a theory in financial economics that states that asset prices fully reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.
The Efficient Market Hypothesis (EMH) was developed by Eugene Fama who argued that stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by chance or by purchasing riskier investments. His 2012 study with Kenneth French supported this view, showing that the distribution of abnormal returns of US mutual funds is very similar to what would be expected if no fund managers had any skill—a necessary condition for the EMH to hold.
There are three variants of the hypothesis: “weak”, “semi-strong”, and “strong” form. The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong form of the EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong form of the EMH additionally claims that prices instantly reflect even hidden “insider” information.
There is no quantitative measure of market efficiency and testing the idea is difficult. So-called “effect studies” provide some of the best evidence, but they are open to other interpretations. Critics have blamed the belief in rational markets for much of the late-2000s financial crisis. In response, proponents of the hypothesis have stated that market efficiency does not mean not having any uncertainty about the future; that market efficiency is a simplification of the world which may not always hold true; and that the market is practically efficient for investment purposes for most individuals.”
At the outset the firm StockX did not have the goal of making market efficiency its top priority, but it has brought it to the secondary market for high-end sneakers. We quote from “This Website Is the Stock Market for Nikes and Rolexes” by Jacob Gallagher of The Wall Street Journal.
“It was Tuesday, Nov. 13, 2018. Though Josh Luber would rather it didn’t, in three days, Adidas was planning to re-release the Yeezy Boost 350 V2 “Zebra,” a black-and-white striped version of its Kanye-West-designed sneaker. Mr. Luber, co-founder of StockX, an online trading platform for sneakers, streetwear, handbags and watches, hates when companies disrupt his market strategy. Within a week, his hypothesis was confirmed: Yeezy Zebras were trading for about $270 on StockX, just $50 above retail and well below their peak of $2,000.
Tracking sneaker values has long been Mr. Luber’s obsession. In the late 2000s, he was a strategy analyst at IBM in New York who spent his nights trawling eBay for data on how much sought-after shoes were selling for on the secondary market. He compiled those figures into Campless, a sort of Kelly Blue Book for sneaker-resale value. But Mr. Luber wasn’t satisfied with eBay. His beefs weren’t limited to the bad photos that sellers posted or their habit of selling fakes. What really bugged him was the absence of price standardization. One dealer might peddle a pair of Nike Dunks for $100 and another might list the same shoes for $300. Mr. Luber envisioned a more orderly market, with a New York Stock Exchange-style ticker, that would make the value of a pair of sneakers transparent, in real time. When those Dunks sold for $100, everyone on the market would know about it, thus forcing other sellers to knock their prices down to the going rate.
Around that same time, Dan Gilbert, the founder of mortgage lending company Quicken Loans, noticed that his teenage son was flipping sneakers on eBay for profit. Intrigued, Mr. Gilbert founded a research team on sneaker reselling who discovered what Mr. Luber was working on. Mr. Gilbert bought Campless in 2015 and the pair joined forces (along with COO Greg Schwartz), launching StockX, “the stock market of things,” based in Mr. Gilbert’s hometown of Detroit in February 2016.
Today, StockX employs nearly 550 people worldwide, and has added watches, handbags and streetwear (including widely hyped hoodies, T-shirts and even skateboards from brands like Fear of God, Off-White and Bathing Ape) to its marketplace. Mr. Luber explained that StockX only deals in rarefied products that balance liquidity and scarcity. A J. Crew gingham shirt will never be on StockX because it’s too common, nor will a Picasso painting, because it’s too rare. A variety of Nike Air Jordans of which only 1,000 pairs may exist is ripe for StockX’s marketplace.
Because of these items’ scarcity, fakes remain a major issue on the resale market. StockX only accepts new merchandise and employs over 100 authenticators to identify counterfeits. “When we started the business three years ago, we couldn’t go to LinkedIn and find sneaker authenticators,” said Mr. Luber. “We basically created that career.” It takes about 90 days to train authenticators who use scales, durometers (to measure density) and apps to spot fakes. Korre Jefferson, 20, a retail associate in Brooklyn, N.Y., said he liked knowing that someone had validated the authenticity of the sweater and pair of sneakers he purchased on StockX this year: “Sometimes on [resale marketplace] Grailed you might have someone selling something that’s clearly fake, so it’s nice to have that security with StockX.” Over email, Grailed co-founder Jake Metzger explained, “We have a team of experienced moderators combing the site every day looking for suspicious users and listings. Any user caught actively selling fake merchandise is banned from the platform.”
The aim is not to turn novices into sneakerheads willing to pay 11 times the retail cost for a pair of Nike’s Off-White Air Jordans. Rather Mr. Luber would like to create a destination for sneaker buyers of every ilk. He noted that a lot of items on StockX do sell for less than their sticker price: “Sometimes it’s just access. It’s a general-release shoe from three years ago, but it’s just not available on Nike.com so now you can get it on StockX.”
In further attempts to expand its reach, last month StockX opened an office in London and has its sights set on China. There are regional differences here and there—fewer basketball sneakers in Europe, more Nike Air Force Ones in New York—but by and large, users want the same sneakers and clothes whether they’re in Brussels or Brooklyn. Often these days, that means Yeezys, Off-White Nikes and Supreme.
For Lucio Nunes, 20, a student in Switzerland who has sold shoes on StockX for two years, using the London office has improved his selling experience. Shipping rates are cheaper, as he no longer has to send his shoes further abroad, and his money clears faster. Still he said, the one downside to StockX is that it has lowered prices throughout the sneaker flipping-world. “The prices are much more visible because everyone looks at StockX and takes it as the market price,” said Mr. Nunes. It’s harder to cheat the market when the ticker price is just a click away.”
The Efficient-Market Hypothesis (EMH) is brought to light in this last quote from Mr. Nunes. Like all theories EMH works up to a point. If EMH worked perfectly there would be no Warren Buffet or successful hedge fund managers like Steven Cohen.
PPLI structuring achieves Harmonious Efficiency through using the conservative vehicle of an insurance policy. Like a trust it is a structuring tool, but a more powerful one in that it has added tax and privacy benefits. The performance of the assets in the policy is managed by an asset manager, and the assets are kept in separate accounts for the policyholder. The performance of these assets is independent from the structure, but the tax benefits of PPLI do provide Alpha thus giving the asset manager an added advantage.
The Harmonious Efficiency we achieve for our clients brings them balance and makes them very satisfied. Please let us know how we can create Harmonious Efficiency for you.
by Michael Malloy, CLU TEP RFC, @ Advanced Financial Solutions, Inc
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