INestments Week 12
W12-Financial Advisor’s Investment Case
Vanessa Avoletta is a very successful self- employed freelance writer of romantic novels. She has a reputation for writing rapidly and is able to complete at least four books a year, which net after expenses $ 25,000 to $ 50,000 per book per year. With this much income, Avoletta is concerned with both sheltering income from taxes and planning for retirement. Currently she is 40 years old, is divorced, and has a child who is entering high school. Avoletta anticipates sending the child to a quality college to pursue a degree in computer sciences. While Avoletta is intelligent and well in-formed, she knows very little about finance and investments other than general background material she has used in her novels.
Since she does not plan to write prolifically into the indefinite future, she has decided to obtain your help in financial planning. At your first meeting, you suggested that Avoletta establish a tax- sheltered retirement plan and consider making a gift to her child, perhaps inthe form of future royalties from a book in progress. Both of these ideas intrigued Avoletta, who thought that funds were saved, invested to accumulate over time, and then transferred to heirs after death. While Avoletta wanted to pursue both ideas, she thought approaching one at a time made more sense and decided to work on the retirement plan first. She asked you for several alternative courses of action, and you offered the following possibilities.
1. An IRA with a bank with the funds deposited in a variable- rate account.
2. A self- directed Keogh account with a major brokerage firm.
3. A Keogh account with a major mutual fund.
4. An account with a brokerage firm to accumulate common stocks with substantial growth potential but little current income.
Avoletta could not immediately grasp the implications of these alternatives and asked you to clarify several points:
1. What assets would be owned under each alternative?
2. What are the current and future tax obligations associated with each choice?
3. What amount of control would she have over the assets in the accounts?
4. How much personal supervision would be required?
How would you reply to each question? Which course( s) of action would you suggest that she pursue? Finally, how would each of the following alter your advice?
1. Avoletta has a record of poor health.
2. Avoletta would like to write less and perhaps teach creative writing at a local college.
3. Avoletta has expensive tastes and finds saving to be difficult.
Mayo, Hubert B. (2011). Investments: An Introduction (10th ed.). Mason, OH: South-Western Cengage Learning
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