Affordable Quality Medical Services: Is It Possible?

In the media, we would see medical professionals such as physicians getting lambasted for the exorbitant fees that they allegedly charge their patients. Even the Bureau of Internal Revenue (BIR) capitalizes on this public perception by placing television advertisements that depict physicians as irresponsible and greedy tax evaders. Of course, as with all other taxpayers, such an accusation is not without basis. However, we really cannot blame physicians, hospitals and other medical service providers for charging relatively high fees because of the amount of expenses they have incurred in acquiring their medical degrees, equipment, facilities, and other related tools of the trade. The thing is, whether you agree with their professional rates or not, the fact remains that availing adequate medical services either from hospitals, clinics, or through house calls entails that you shell out a substantial amount of money, which may ruin your budget and cripple your cash flow. The bad news is that we are all mortal humans and are therefore susceptible to various sicknesses and diseases. Heck, even Superman gets sick when exposed to Kryptonite!

However, the good news is that there are certain financial products that can help ordinary persons such as rank-and-file employees and contractual workers avail of otherwise costly medical services for a fraction of a price. These financial products come in the form of health maintenance organizations (HMO) and health insurance. For a small amount referred to as premiums, HMO members and critical illness insurance policy owners do not need to carry the burden of their own medical expenses nor that of their dependents if so covered by their plan.

Nonetheless, many people still get confused between health or medical insurance and HMOs. Some of them even think that HMOs are a sort of a pre-need plan much like education plans and memorial plans. Such confusion is exacerbated by the issuance of Executive Order 192 on November 12, 2015, which transfers the regulation and supervision over HMOs from the Department of Health (DOH) to the Insurance Commission (IC). Although a good move by PNoy, it really does not help when the IC division in charge thereof is the Pre-need Division, albeit temporarily.

Moreover, such confusion in the minds of our countrymen may cause some unnecessary damage to both industries in that health/medical insurance operates differently from that of HMOs. People desiring one or the other may be made to invest in a product that they did not intend to get in the first place then put the blame on the entire industry when they fail to receive the services or reimbursements they require.

According to Investopedia, “health maintenance organization is an organization that provides health coverage with providers under contract. A Health Maintenance Organization differs from traditional health insurance by the contracts it has with its providers. These contracts allow for premiums to be lower, because the health providers have the advantage of having patients directed to them; but these contracts also add additional restrictions to the HMO’s members.

HMO’s are believed to have been started in the early 1900s when companies began to offer employees plans of prepaid medical service, and have done very well since. The HMO Act of 1973 helped to cement the HMO into the U.S. health system by providing grants to start or expand HMOs, removing many restrictions imposed by the individual states, and required employers with more than 25 employees to offer a federally-certified HMO to employees.”

So which is better, HMO or health insurance? Neither, actually. HMOs and health insurance should not be perceived as exclusive from each other moreso as competitors. Inasmuch as health insurance policies provide higher benefit coverage than HMOs, the latter serve as a primary defense against medical costs because HMO members do not need to shell out their own money unlike in a health insurance policy which reimburses the insured only after they have paid for the hospitalization or medical services themselves. Therefore, as a financial planner, I would recommend that people both sign up with a reputable HMO and purchase a life insurance policy with a critical illness rider in order to cover for the medical expenses that may exceed the maximum benefit limit of the former.


Terence Camua is a lawyer and a registered financial planner of the RFP Institute Philippines. He is likewise the senior vice president for operations of IMS Wellth Care, Inc. For questions on law or personal finance, e-mail him at or

The G.O.O.D. Plan

“The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7, ESV).

“Owe nothing to anyone—except for your obligation to love one another. If you love your neighbor, you will fulfil the requirements of God’s law”
(Romans 13:8, NLT)

In my previous article, we talked about the first phase in the personal financial planning process: cashflow management. Now, we will be discussing the second phase, the “D” in the CD-RW process, which is debt management or what we call the “GOOD” plan, which stands for “Getting-Out-Of-Debt.” Nevertheless, remember what I have said before, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.

Unfortunately however, most people, even lawyers, get into the bad kinds of debts, particularly, consumer debts. Consumer debt comes in many forms, the most popular one being credit card debt. Believe me, I’ve been guilty of that as well! For those who are employed, your firm may also offer cooperative loans if you are a member of one. Moreover, as you get older and more successful in your law practice, you will also probably get a car loan or a housing loan, especially when you get married. And yes, having a nice car can definitely help you get more and better clients as it gives them the perception that you are successful and worth your salt.

According to the Bangko Sentral ng Pilipinas (BSP), there are over six million credit cards issued in the Philippines. The BSP reported that the Philippine banking system had P130 billion in credit card receivables as of September 2009, 13% of which were non-performing. Take note, that was 6 years ago. What more today? The problem arises when credit cards and other kinds of consumer loan facilities are abused. Ideally, credit cards should only be used for emergency purposes but if it really can’t be helped, you must at least make sure to pay the whole amount when the bill arrives and not just the minimum required amount. Paying only the minimum just buries you deeper and deeper into debt.

To make things worse, banks make it easier and easier for just about anyone to get a credit card these days. One day, you will just be surprised to find a pre-approved credit card under your name right at your doorstep (or mailbox), if you haven’t already! Verily, unexpectedly receiving those precious little plastic cards will make you feel like you have just won the lottery. But beware, what appears to be a blessing might actually turn out to be a curse!

New York Times best-selling author, wealth coach, and radio host, Dave Ramsey, said, “Personal finance is 80% is behavior and 20% head knowledge.” Daniel Kahneman, in his best-selling psychology book, Thinking, Fast and Slow, proved through experimental exercises that the emotional mind is more powerful than the rational mind. In other words, skill, although indispensable, is only the tip of the iceberg. No matter how skillful a person is, if his behavior or habits are terrible, then all those technical knowledge and skills go out the window. As celebrity wealth coach Chinkee Tan puts it, “It’s all in the attitude, dude!” Although, such a thing is also true for all other endeavors, it is more so for personal finance.

Getting in debt is a lot easier than getting out of it. It is easier to borrow money than pay it back. Debt is like a quicksand that is constantly trying to pull you down. The more you struggle, the harder it is to get out. Likewise, if we refuse to give up some of the comforts in life and change our spending habits, we will sink deeper and deeper into debt. For things to change, we have to change. In his book, Debtermined, personal development and success coach, Jayson Lo, discussed a three-pronged solution brothers Chip and Dan Hearth came up with.

  • Direct the Rider
  • Motivate the Elephant
  • Shape the Path

The Rider represents the rational mind, the elephant, the emotional mind, and the Path is the direction a person wants or needs to go. The Rider holds the reins and seems to be the one in control, but the Rider’s control is unstable because he is so much smaller than the Elephant. The Rider and the Elephant need to come together and shape the Path by creating a detailed image of what the destination would look like once changes are made. Their book, Switch: How to Change Things When Change is Hard, calls it a “destination postcard.”

The tension arises, says Lo, when the Rider and the Elephant pull in different directions. Riders without Elephants produce understanding without motivation. Elephants without Riders produce passion without direction. Riders and Elephants without a clear path produce movement without progress.

According to my friend and internationally-renowned registered financial planner Randell Tiongson, author of No Nonsense Personal Finance, before we buy anything on credit, there are some things we must consider: First is purpose. What is the compelling reason why we need to borrow money? Don’t you have any other source of funds than credit? Is what you are planning to buy with the borrowed money a need or a want? If it is merely a want, wouldn’t it be better to just postpone the purchase until you have saved sufficient money for it? Avoid impulsive buying. There were a lot of times that I really felt that the thing that I wanted to buy was a need but after a good night’s sleep, I realized the following day that I can actually do fine without it.

Second is cost. Despite the disallowance of the Department of Trade and Industry (DTI) on charging additional fees for credit card purchases, merchants have since come up with cunning ways to circumvent the law. And yes, this includes “zero interest” purchases on installment. Instead of calling it “interest,” merchants would instead say that they will give you a discount if you purchase it using cash. That’s why it may still be wisest to purchase things on cash basis. If you want to learn more how this works and more, attend our Financial Planners’ Training leading to the globally-recognized Associate Financial Planner (AFP) professional certification.

Third is interest. We all know about legal fruits. No, not just the mangoes, bananas, strawberries and the like—although those are included. I am pertaining to civil fruits, industrial fruits, and yes, natural fruits. One of the most ubiquitous civil fruits aside from rent is interest. Interest is what debtors pay their creditors as compensation for the use of their money. The thing is, consumer loans, as opposed to business or corporate loans, often carry with it higher interest because of the risk factor. Most banks charge 3% to 3.5% per month as interests on credit card purchases. That would result in annual nominal interest rates of around 36% to 42%! Take note, we are only talking about banks. Non-institutional lenders such as loan sharks, 5-6, or other private lending companies can charge up to 20% per month! What’s worse is that interest on debts is usually compounded. Compounding interest is simply interest upon the interest upon interest. Many people do not realize the power of compounding interest in relation to time. Compounding interest can work for you or against you depending on which side of the balance sheet you are. The value of your money today, whether you borrowed it or invested it, will not be its value five, ten, or twenty years from now. This is what financial planners refer to as the time value of money.

But what if you are already waist or neck-deep in credit card debt? The first and foremost thing that you should do is to resolve within yourself. Resolve to get out of debt and stay out of debt. Insanity, as defined by Albert Einstein is “Doing the same things over and over again but expecting different results.” So, after resolving to get out of debt, it is time to act on that resolve. Start by making a list or inventory of all your outstanding debts including the balance, start date, and status. Then, using what financial planners call the snowball method, start paying off your debt with the lowest amount. Doing so is more achievable and realistic. After you have paid that off, you can now proceed to the next bigger debt and so on and so forth until you have paid off all your debts. When you see you debts getting paid off one by one, it encourages you to take on the next bigger debt unlike if you start with the largest debt, which might just end up in frustration due to its seeming impossibility.

There may be times of plenty when you will suddenly get to earn big bucks because of a lump sum payment such as an acceptance fee, packaged deal, success fee, or a new regular retainer fee. Other possible sources could be from bonuses, inheritance, awards, or even raffle prizes. Heck, you can even organize a garage sale for those stuff that you don’t actually use anymore and are just gathering dust in your attic or storage room! Be wise, pick your brain. Better yet, if you’re married, pick your spouse’s brain! Such unexpected income can be used to escalate your debt payments thereby accelerating your debt-extinguishment objective.

Be faithful in paying your debt; but more importantly, be faithful to God. Do not forget what we discussed previously. Tithe! God is the source of everything. If you worship him through your finances and acknowledge that the solution to your problem is him and not just money, then God will give you the ability to produce wealth (Deuteronomy 8:18). This isn’t easy, especially when you are in debt. Nevertheless, Jesus said that if we “seek first his kingdom and his righteousness…all these things will be given to you as well” (Matthew 6:33, NIV).

Last but definitely not the least—in fact, this should be the first thing you do—is pray. We cannot do it on our own strength. We need God’s wisdom and grace to help us in this situation. Remember to “Trust in the LORD with all your heart, and do not lean on your own understanding. In all your ways, acknowledge him, and he will make straight your paths” (Proverbs 3:5-6, ESV). For God promises that “If any of you lacks wisdom, let him ask God. Who gives generously to all without finding fault, and it will be given to you” (James 1:5, NIV).

May the LORD bless you and keep you;
May the LORD make his face shine upon you and be gracious to you;
May the LORD turn his face towards you and grant you peace. Amen.

Personal Finance for Lawyers


A lot of people think that lawyers make a lot of money. People automatically think highly of you: “Oh, you’re a lawyer, you must be rich or at least you’re getting there.” However, there is nothing farther from the truth. Of course, there are those blessed few who have made it to the big leagues and are now founding or senior partners of large and prestigious law firms. Surely, without possessing other sets of skills, in-depth knowledge of the law alone will not and cannot guarantee financial freedom and prosperity.

Lawyers usually earn in one of three ways: a) as a purely compensation income earner, i.e. as an employee; b) as a fee-based self-employed professional; or c) a combination of the first two. The problem is, especially for self-employed lawyers, as well as other similarly situated professionals, our income is wholly dependent on how much man-hours we put into working. In other words, no work, no pay! Those who use the time-billing method know this particularly well. As such, most lawyers end up working all their lives because no matter how old we get, for as long as we’re alive, our cost of living just keeps on going up to no end! Sometimes, we even proudly use it as a battle cry, “Lawyers never retire!” Verily, the stereotypical image of the “Abogado de campanilla” comes to mind: An old thin man with unkempt gray or balding hair wearing a faded barong carrying his briefcase to court. Indeed, it is such a sad and sorry sight to behold. I know because I’ve seen them. And could you imagine what would happen to them if they become too old to work or permanently incapacitated?

Generally, lawyers, except for those who are at the same time finance professionals such as CPAs, CFAs, RFPs, RFCs, CFCs, CWMs, etc., abhor numbers. To be sure, one of the significant reasons why people take up law, among other things, is because they did poorly in math and science during their elementary and high school days. Wait, I might just be describing myself here! Nevertheless, studying law and passing the dreaded bar exams do not require one to be adept in numbers. There are no complicated formulas or computations save for the determination of an employee’s minimum wage, a stockholder’s shares of stocks, or the occasional computation of taxable income; although the last one is pretty much done by accountants. The point is, lawyers, nay; most people in fact, just tune out when numbers are involved. As behaviorist Daniel Kahneman said in his landmark book, Thinking, Fast and Slow, our brains usually take the shortcut or the easier route when we are faced with numerical problems, which he refers to as the “System One” mode of thinking.

No wonder, it is because of this numerical aversion that lawyers avoid thinking about personal finance. To make things worse, society’s high regard for lawyers along with the dignity of the profession leave lawyers with no other choice but to do their very best to project success and honorability in how they dress, walk and talk. These kinds of expectations, not to mention the challenges of life itself, put a strain on a lawyer’s finances, especially if that lawyer already has a family of his own.

Having said this, learning about personal financial planning is indispensable for a person who wants to achieve financial freedom and prosperity, regardless of occupation. But the big question in most people’s minds is, “Where do I begin?” And a very good question it is indeed because personal financial planning is a process. Being a process, you should not jump from one step to another without completing the previous step. At Personal Finance Advisers Philippines (PFA), we have what registered financial planner and seasoned investment adviser Efren Cruz, calls the CD-RW approach to personal finance. CD-RW stands for the phases of or major steps in the financial planning process, which are: Cash, Debt, Risk and Wealth. Not undertaking any one of the four areas of financial management will lead to instability in one’s personal finance. Other registered financial planners divide the steps into five or twelve as do Randell Tiongson and Alvin Tabaňag, respectively. For simplicity and ease, however, we shall summarize the process to the four steps. A person hoping to get out of debt should not be investing before he reduces his debts to manageable levels. In fact, he shouldn’t be investing at all if he hasn’t yet protected his downside risks through insurance. Let me briefly discuss each phase:

Cash” pertains to improving one’s cashflow. There are many ways to do this such as getting a promotion, getting more clients, starting a business, or selling some stuff that you do not need anymore. In fact, Robert Kiyosaki refers to this as Financial Intelligence No. 1. Short-term and current savings also fall under this phase. In fact, these two steps under this phase may and should be done simultaneously if you can. In fact, being successful in this area alone would definitely have a strong and lasting impact in your financial well-being.

Debt” pertains to getting out of debt. Albeit, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.

Risk” pertains to protecting yourself and your family from life’s unexpected risks such as loss of job, total and permanent disability, and even death. The steps comprising this phase are setting up one’s emergency fund and insurance planning—both life and non-life. Although not usually done, I would also include here adequate asset protection planning.

Wealth” pertains to the accumulation thereof through long-term saving and investing. In other words, it is how to make your money work for you and not just you working for money. This is the phase where if successful, can spell the difference between being rich, just right, or poor. The primary reason we should be investing is because we will not always have the ability to generate income. Investing can be in the form of real estate, business, commodities, or the most popular class, paper assets such as stocks, bonds, money market instruments and pooled funds. Of course, we cannot bring our wealth with us when we pass on from this life, hence, included in this phase is estate planning or how to legally pass on your property and money to your loved ones when that time comes.

For now, we will focus on the first phase, which is the foundation of the financial planning process, and that is cashflow management. Contrary to popular belief, cashflow management is not only about being frugal when it comes to one’s expenses but about being wise. In behavioral economics, it is said that finance is only 10% skill and 90% behavior. This means that while we may possess all the necessary technical skills, all of that will be for naught if we cannot control ourselves and exercise prudence when it comes to spending our hard-earned money.

For effective cashflow management, categorize your expenses into “needs” and “wants,” the latter also being referred to as “discretionary expenses.” One of the biggest mistakes people make is rushing into financial decisions without considering what’s really important for them. As many people get caught up in the responsibilities of their daily lives, they often do not have time for reflection. The easiest way to identify wants is to actually start with needs. Needs can be further broken down into two broad categories: absolute or bare necessities and near necessities. Absolute necessities are those that are important for our basic survival, things like food, shelter and clothing. On the other hand, near necessities include things like reliable transportation, insurance coverage, utilities, telecommunications, and personal care expenses. While these last items are not necessary for survival, they are fairly important for us to function as responsible and effective members of society. Now that we know what needs are, it would be easy to define our wants. Now, everything else that do not fall into the category of needs are therefore classified as wants and could be cut out if necessary. To be more specific, wants are items that are only nice to have. They are not things that you need to survive. Although sometimes, needs turn into wants when you take your needs beyond the basics, i.e. if you buy a home that is much larger or a car that costs more than you can afford. Carefully go through your expenses and determine which are truly needs, and which are actually wants the order them. After determining your needs and wants, create a plan for living within your means. This is important to finding success in your personal finance.

To reach a certain place, the first thing you must know is where you are right now. You simply cannot plot your course without knowing your starting point. In order to know where you are financially, you have to determine your net worth. Your net worth is an important barometer of your financial health. It indicates your capacity to accomplish major financial goals to be discussed later. Just as all government officials are mandated to submit their Statement of Assets, Liabilities and Net Worth (SALN), everyone would do well to follow suit as this is an excellent tool for financial planning. To compute your net worth, you just have to follow this simple formula: Assets – Liabilities = Net Worth. Your assets consist of everything you own, both real and personal properties including cash in bank and cash on hand; while your liabilities consist of everything you owe such as debts and taxes. For financial planning purposes however, it is generally recommended that you exclude your family home when figuring out your financial assets. Include your home only if you expect to someday sell it or otherwise have it leased out to generate passive income.

Once you have determined where you are, the next preparatory step is to know where you want to go. In short, determine your goals. Your goals will vary depending on the life stage you are in; whether you are a student, single professional, married, married with children, empty nester, or retired. Accordingly, your financial goals may be one or more of the following: income continuation, starting a business, children’s education fund, health fund, buying a house or a car, getting married, a family vacation, retirement fund or estate creation and preservation. It is important to determine your goals as each of these goals will have a corresponding cost that you will need to prepare for. Not knowing where you are or where you are going will only lead you nowhere fast! It would just be like driving around aimlessly with no purpose in mind except to waste precious fuel. Failure to plan is a plan to fail.

Once you have plotted your course, it is now time to gather your resources for the journey, and this is where saving money comes into play. Most people however, if not everyone, try to save only what is left, if any, of their salary or income after paying all the bills and cost of living expenses, sometimes even including their leisure expenses. And this is exactly why they fail. Instead of using the formula Income – Expenses = Savings, we should change our mindset to Income – Savings = Expenses. Better yet, I’ll let you in on the secret formula to prosperity: Income – Tithes – Savings = Expenses. Specifically, the apportionment should be as follows: 100% (Income) – 10% (Tithes) – 20% (Savings) = 70% (Living Expenses). Now why do I include the tithe? It is because I believe that because God is the one who gives us the ability to produce wealth (Deuteronomy 8:18), then giving back the tithe is one of the best ways we can honor Him with our wealth. To be sure, God told the prophet Malachi to instruct His people to “Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the LORD of hosts, if I will not open the flood windows of heaven for you and pour down for you a blessing until there is no more need” (3:10, ESV). In fact, this is the only exception to God’s law against putting Him to the test (Luke 4:12). This principle of saving is referred to a “Paying God and yourself first.” Nonetheless, if saving 20% is really difficult for you right now, you can start small with just 10% and increase it later on when your cashflow improves.

Saving is an essential part of the process because the funds accumulated as a result of which is where you will source the money needed for your emergency fund, paying off your loans, insurance premiums, and investments, in that particular order if not simultaneously. Without improving your cashflow and saving money, any financial planning activity shall be futile for lack of the ability to execute the same. The strategy to saving effectively is quite simple and is no secret at all: “Spend less than you earn,” or to put it in another way, “Live below your means.” It never fails. One can choose to be a saver or a big spender. The big spender follows the incorrect formula for saving. I know, it’s so much easier said than done; but with God’s grace, it is truly possible!

Some people tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial—and personal—problems would melt away. The thing is, as Robert Kiyosaki puts it, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” In short, it is all about increasing our financial I.Q. Remember, you cannot grow what you do not have. Regardless of your income or how you earn your income, you can make your money stretch further if you practice good financial habits and avoid mistakes. Effective and efficient cashflow management is essential to building wealth. In fact, the lower your income, the more important it is that you make the most of your income and savings because you don’t have the luxury of falling back on your next fat paycheck to bail you out. As aptly posited by Alvin Tabaňag, “A healthy amount of savings is the foundation on which you will build your personal wealth. Without any savings it is impossible for you to achieve financial security.”

There is so much more to learn about personal financial planning that this article can cover. Unfortunately, personal finance, for all its importance and practicality, is not generally taught in our schools. Yes, we have economics in high school and college, but the theories taught therein are usually either archaic or inapplicable in real life due to its extreme technicality. So, invest in yourself first. Read books, blogs and attend seminars of reputable finance professionals such as those mentioned above. The journey of a thousand miles begins with a single step. May the grace of our Lord be with you!

General Tax Audit Procedures and Documentation

Assessment Process

1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue.

When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).

10. Within what time period must an assessment be made? An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment.

Any assessments issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations.

11. What is “Jeopardy Assessment”? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return. A jeopardy assessment is illegal.

12. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment.

13. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

14. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.

15. What is required of a taxpayer who is being audited? A Taxpayer who is being audited is obliged to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of the recipient and the date of receipt.

Present within a reasonable period of time, his books of accounts and other related accounting records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable amount of time from his (Taxpayer’s) receipt of the Letter of Authority.

16. What is the recourse of a Taxpayer who cannot submit the documents being required of him within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of accounts and/or other accounting records, intends to request for more time to present these documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations.

17. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a signed statement whereby the Taxpayer conveys his agreement to extend the period within which the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the defense of prescription for assessments issued after the reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized Bureau official.

18. If a Taxpayer does not agree with the assessment made following an audit, can he protest this Assessment?Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by filing a letter of protest stating in detail his reasons for contesting the assessment.

19. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the following conditions:

It is made in writing, and addressed to the Commissioner of Internal Revenue;

It contains the information, and complies with the conditions required by Sec. 6 of Revenue Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first.

g.) The itemized schedule of the adjustments with which the taxpayer does not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable.

It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal Letter of Demand.

20. In the event the Commissioner’s duly authorized representative denies a Taxpayer’s protest, what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied by the Commissioner’s duly authorized representative, the Taxpayer may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureau’s Appellate Division. The Appellate Division serves as a “Court”, where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to support their respective claims.

21. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted?

Should the Taxpayer’s request for reconsideration be denied or his protest is not acted upon within 180 days from submission of documents by the Commissioner, the Taxpayer has the right to appeal with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the Commissioner’s decision denying the request for reconsideration or from the lapse of the 180 day period counted from the submission of the documents. (Sec. 228 of the Tax Code, as amended).

22. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal the decision to a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of Appeals within fifteen (15) days from the Taxpayer’s receipt of the CTA’s decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this decision with the Supreme Court.

23. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec.229, NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his right to the refund or tax credit.

24. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this claim, can the Taxpayer elevate his claim to the CTA?

25. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayer’s receipt of the second written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum.

26. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and 266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of Court.

27. What alternatives are open to Government for the collection of delinquent accounts?

Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

28. What is “Distraint of Personal Property”? Distraint of personal property involves the seizure by the Government of personal property – tangible or intangible – to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.

29. What is “Levy of Real Property”? Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy.

30. In what time period must collection be made? Any internal revenue tax, which has been assessed within the period prescribed shall be collected within three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from assessment of the tax or from the last waiver.


Robert Kiyosaki: From Rich Dad to Bankrupt Dad?

I first heard about Robert Kiyosaki was when I was in high school. My older brother was raving about it during one of our Sunday family gatherings. He was so amazed with the unorthodox ideas that Mr. Kiyosaki shared in his first book, Rich Dad, Poor Dad. However, being young and carefree back then, it wasn’t until after several years when I was already in law school that I began reading his books. Indeed, in communicating his point of view on why ‘old’ advice – get a job, save money, get out of debt, invest for the long term, and diversify – is ‘bad’ (both obsolete and flawed) advice, Robert has earned a reputation for straight talk, irreverence and courage. So revolutionary were his teachings that when I shared them with my dad, he simply shot them down for being a bunch of nonsense. Of course, now that I am a licensed attorney and financial planner, I realized that Mr. Kiyosaki’s teachings actually made a lot of sense.

Nevertheless, in late A.D. 2012, news began to spread all over social media that Rich Dad® Robert Kiyosaki is now a bankrupt dad because in August of that year, his company, Rich Global LLC, just filed for bankruptcy. So does this really mean that one of the world’s most famous, if not the most famous, personal finance gurus, the one who was allegedly mentored by his best friend’s rich dad several decades ago as a child, failed and became poor all of a sudden? Before we get to that, let me first give you an idea on what filing for corporate bankruptcy really means.

Title 11, of the United States Code, a.k.a. the United States Bankruptcy Code, is the main source of bankruptcy law in the United States. Chapter 7 thereof governs the process of liquidation and is the most popular and common form of bankruptcy. When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 trustee. A trustee is appointed almost immediately, with broad powers to examine the business’s financial affairs. The trustee generally liquidates all the assets and distributes the proceeds to the creditors. In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed.

Here in the Philippines, our laws refer to bankruptcy proceedings as ‘insolvency’ proceedings. In fact, just five years ago, the Financial Rehabilitation and Insolvency Act of 2010 or FRIA was passed. The new law provides for the substantive and procedural requirements for the rehabilitation or liquidation of financially distressed enterprises and individuals. The FRIA defines “insolvent” as the “financial condition of a debtor that is generally unable to pay its or its liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.” Now you may ask, why would a very rich man like Robert Kiyosaki allow the company he built to go bankrupt or insolvent?

It was reported that the founder of Learning Annex, Bill Zanker, sued Rich Global for $24 million. Learning Annex was one of his supporters when he was still starting as a businessman. Actually, Robert Kiyosaki owns many businesses and Rich Global LLC is just one of those corporations. Robert now runs most of his businesses under his other company, Rich Dad Co. In fact, Rich Dad Co. CEO Mike Sullivan informed the New York Post in an interview that Robert Kiyosaki would not be putting any of his personal fortune toward the settlement. Now, that is the beauty of using a corporate entity as a vehicle for one’s business. It provides a layer of protection against asset raiders such as legal plaintiffs. You see, when a company files for bankruptcy or insolvency, its creditors, including its judgment creditors, cannot just simply collect from the company nor seize it assets legally without first complying with the requirements of the law. That is why Robert Kiyosaki is still quite rich even after filing for bankruptcy with an estimated net worth of $80 million. Having his company Rich Global LLC file for bankruptcy was merely a legal strategy in order to protect his personal assets.

Instead of losing his credibility as a personal finance coach and wealth advisor, such a bold move by Robert Kiyosaki just proves that he is indeed financially intelligent. So much so that he is certainly more financially intelligent than most people, especially those who immediately jumped the gun in judgment against him upon reading the news headlines about his company filing for bankruptcy. Although I have my differences with some of his theories, I along with my colleagues in the financial services industry consider his books as indispensable reading in personal finance and entrepreneurship. It is truly undeniable that all of us, in one way or another, were illuminated and inspired by his teachings.

I am so excited about his upcoming event, Robert Kiyosaki Live in Manila: Masters of Wealth, which will be held on November 30, 2015 at the SMX, Mall of Asia. It’s a once in a lifetime opportunity to learn not only from the master himself but also from other world class wealth coaches, economists, businessmen and educators. I believe that to be financially successful, the first asset that we should invest in is ourselves.

Kiyosaki Live


Financial Accounting vs. Tax Accounting

“Then render to Caesar the things that are Caesar’s, and to God the things that are God’s.” (Luke 20:25, ESV)

Although roughly only 10% of taxpayers are audited annually, professionals and business owners are in constant fear of the Bureau of Internal Revenue (BIR), especially with the spunky Commissioner Kim Jacinto-Henares at the helm thereof. In speaking and interacting with several accountants in a business setting, I have heard them say again and again that no matter how well they prepare a client’s financial statements, the BIR can and will always find a deficiency somewhere. To be sure, this is not only true for small and medium accounting and auditing firms but with big ones as well.

Certified Public Accountants (CPAs) use financial accounting principles or what is more commonly known as Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). In the Philippines, we have adopted the International Financial Reporting Standards (IFRS) as our Philippine Financial Reporting Standards (PFRS). The problem arises when these audited financial statements (AFS) are submitted to the BIR as attachment to company or individual Income Tax Returns (ITR) for purposes of computing the tax liability. This is due to the fact that the BIR does not use the same accounting principles and standards used in financial accounting but rather that which is provided for by law under the National Internal Revenue Code of 1997 (NIRC) or Tax Code for short, along with revenue issuances by the Commissioner of Internal Revenue, such as Revenue Regulations (RR), Revenue Memorandum Orders (RMO), and Revenue Audit Memorandum Orders (RAMO), among others.

RR No. 8-2007 provides that “the recording and recognition of business transactions for financial accounting purposes, in a majority of situations, differ from the application of tax rules on the same transactions resulting to disparity of reports for financial accounting vis-à-vis tax accounting.” Moreover, RMC No. 22-2004 states that “It has been observed that the GAAP and GAAS approved and adopted may from time to time be different from the provisions of the Tax Code.” It then provides that “All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code. Taxability of income and deductibility of expenses shall be determined strictly in accordance with the provisions of the Tax Code and the rules and regulations issued implementing the said Tax Code. In case of difference between the provisions of the Tax Code and the rules and regulations implementing the Tax Code, on one hand, and the GAAP and GAAS, on the other hand, the provisions of the Tax Code and the rules and regulations issued implementing the Tax Code shall prevail.” In a separate ruling, the BIR held that “Therefore, it is the financial statements which is in conformity with the Tax Code that should be attached in the filing of Income Tax Returns” (BIR Ruling No. M-111-2006).

This is the main reason why the BIR always finds alleged deficiencies in a taxpayer’s tax return and payment. But what if you have already been using financial accounting principles for the longest time in filing your ITR? Don’t worry, all hope is not lost. RR No. 8-2007 further provides that “Hence, there is a need to reconcile the disparity in a systematic and clear manner to avoid irritants between the taxpayer and the tax enforcer. Accordingly, concerned taxpayers are hereby mandated to maintain books and records that would reflect the reconciling items between Financial Statements figures and/or data with those reflected/presented in the filed Income Tax Return (ITR). The recording and presentation of the reconciling items in such books and records shall be done in such a manner that would facilitate the understanding by the examiners/auditors of the Bureau of Internal Revenue tasked to undertake audit/investigation functions, providing in sufficient detail the computation of the differences and the reasons therefore aimed at bringing into agreement the IFRS and ITR figures.”

Surely, such reconciling of records is indeed taxing (pun intended)! So, in order to avoid such a predicament and the headaches that come along with it, it would be better for taxpayers to adopt tax accounting methods and principles as the PFRS from the very beginning instead of the IFRS as their GAAP and GAAS. For more information on tax accounting principles and methods, please refer to RAMO 1-2000, which serves as the guidebook of BIR auditors and examiners in implementing the provisions of the Tax Code, or consult a competent tax professional.


Effects of the Different Property Regimes in the Computation of the Estate Tax Due

Someone asked: “Atty. Terence, I just wanted to ask, what if there was a prenup agreement? How do you divide the properties and compute the estate tax due? Will a prenup supersede the law of a community property with regard to estate tax?”


Answer: A prenuptial agreement, otherwise known legally as a marriage settlement, is a contract entered into by the parties intending to get married, which must be executed by them prior to the wedding, otherwise, the same shall be void. The primary purpose of a marriage settlement is to determine the property regime of the parties to the future marriage other than that provided for by law by default.

Estate tax, also known as inheritance tax, is a tax on the right of a deceased person to transmit his estate to his lawful heirs and beneficiaries. Contrary to popular belief, it is not a tax on property but on the right to transmit property at death, and is measured by the value of the property.

Now that we know what estate tax is, we should then consider the different kinds of property regimes that a married couple can enter into in order for us to properly compute the value of their respective gross estates and ultimately, their net taxable estates.

For marriages celebrated after or on the effectivity date of the Family Code, which is on August 3, 1988, in the absence of a valid marriage settlement, the default property regime of absolute community of property (ACP) shall govern. In a regime of ACP, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. However, the following are excluded therefrom: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse; however, jewelry shall form part of the community property; and (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

On the other hand, for marriages celebrated before the effectivity of the Family Code, the default property regime of conjugal partnership of gains (CPG) provided for under the Civil Code, the effectivity of which began on August 30, 1950, shall prevail. The same is true in case the future spouses agree in the marriage settlements that the regime of conjugal partnership of gains shall govern their property relations during the marriage. In a regime of CPG, the husband and wife place in a common fund  the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage of the partnership, the net gains or benefits obtained by either of both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Hence, the following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband.

Lastly, in a regime of complete separation of property (CSP), each spouse retains ownership of his or her own properties including the fruits thereof. In short, what’s yours is yours and what’s mine is mine. Article 134 of the Family Code provides that in the absence of an express declaration in the marriage settlements, the separation of property between spouses during the marriage shall not take place except by judicial order. Such judicial separation of property may either be voluntary or for sufficient cause.

So, after determining the share of each spouse from the mass of the community or conjugal property, we can now compute for their respective individual gross estates. Section 85 of the National Internal Revenue Code provides that “the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated; Provided however, that in the case of the non-resident decedent who at the time of his death was not a citizen of the Philippines only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.”

Having determined their respective individual gross estates, we can now proceed to computing their net taxable estates taking into consideration the applicable exclusions and deductions provided for by law.


Advantages of Investing in Mutual Funds

When it comes to investing in the stock market, financial and investment advisers will always caution potential investors that before they place their hard-earned money therein, they should first be all-SET. This means that they should have the Size of funds, Expertise and Time. However, even though a potential stock market investor may not be all-SET, there is still an alternative paper asset that one can invest in — Mutual Funds. Below are the advantages of investing in mutual funds according to the Philippine Investment Funds Association (PIFA) and the Securities and Exchange Commission (SEC) along with my additional comments:

1. Professional Management

One of the main attractions of mutual funds is that it affords its investors, particularly the small ones, the services of full-time professional managers whose job is to analyze the various investment products available in the market and select those that would give the best possible returns to the fund and its shareholders.

2. Low Capital Requirement

Direct investments usually require substantial capital. The minimum investment amounts for Treasury Bills and Commercial paper, for instance, range from P100,000 to P1,000,000 depending on the bank or investment house you are dealing with. This also holds true for stock because while you may be able to buy one “lot” (shares are sold in board lots ranging from 10 shares to 1 million shares depending on the price at which these shares are traded) for as low as P1,000 or P5,000, you may not be able to buy the stock that you really want, especially the blue chip and growth stocks.

3. Diversification

There is a saying that goes, “Do not put all your eggs in one basket.” This adage is especially true in the world of investments which is full of uncertainties. In fact, even King Solomon, the wisest king who has ever lived, said, “But divide your investments among many places, for you do not know what risks might lie ahead (Ecclesiastes 11:2, NLT). There is no such thing as a “sure” thing. An important investment principle that requires holding several securities to reduce the risks associated with investing in individual securities is called diversification. When you invest in a mutual fund, you achieve instant diversification because the fund is required by law to be invested in a wide array of issues and/or securities.

4. Liquidity

Liquidity is the ability to readily convert investments into cash. Other investment products require you to find  buyer so that you can liquidate your investments. That is not the case with mutual fund shares because the fund itself stands ready to buy back these shares at the prevailing Net Asset Value Per Share. While the law provides that redemption proceeds must be given within seven (7) banking days from the date of the redemption request, most funds are able to pay the redemption proceeds within the next day. Mutual Funds are, therefore, considered very liquid investments.

5. Safety

Safety is a very important consideration for most investors. Mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act and its Implementing Rules and Regulations. Mutual funds are prohibited from investing in particular investment products and engaging in certain transactions. They also have to  submit regular reports to  the SEC as well as to their shareholders.

6. Potentially Higher Returns

Because a mutual fund is managed as a single portfolio, it is able to take advantage of certain economies of scale. For instance, with its millions of pesos (or other currency) under management, it can negotiate for lower stockbrokerage fees or higher interest rates on fixed-income instruments. In the end, however, it is still the investment company adviser who really makes the big difference when an individual is faced with this decision — “Will I make direct investments by myself or will I invest in a mutual fund?” Because very few individual investors can match the experience and skill of full-time professional fund managers, the investing public is well advised to invest in a mutual fund instead.

7. Convenience

Mutual funds are purchased directly through SEC-licensed Certified Investment Solicitors (CIS) only. These CIS are usually connected to banks, insurance companies, investment companies, or brokerage firms and normally provide personal, tailor-fit service. Some fund companies have even set up retail centers for investors. Many have payroll deduction plans and some funds, with proper authorization, will deduct and invest on a regular basis a specified amount from the shareholder’s bank account.

Funds offer a variety of services, including preparing monthly or quarterly account statements, automatically debiting additional investments from, or crediting redemption proceeds to, the investors’ bank account; or allowing transfers from one fund to another. Most major mutual fund companies offer extensive record-keeping services to help investors track their transactions and follow their funds’ performance via phone, text message, or the internet.

8. Transparency

Investment company advisers (such as Philam Asset Management, Inc.) provide investors with updated information pertaining to the fund. All material facts are disclosed to investors as required by the SEC.

9.  Flexibility

Investors are allowed to modify investment strategies over time by transferring or moving from one fund to another within a mutual fund family.

Some of the Things that a Professional Financial Advisor Does

Financial Planning:
• Cares more about you and your money than anyone who doesn’t share your last name
• Asks questions in order to understand your needs and objectives
• Helps you determine where you are at present
• Guides you to think about areas of your financial life you may not have considered
• Helps organize your financial situation
• Formalizes your goals and puts them in writing for you
• Helps you prioritize your financial opportunities
• Helps you determine realistic goals
• Studies possible alternatives that could meet your goals
• Prepares a financial plan and/or an investment policy statement for you
• Makes specific recommendations to help you meet your goals
• Implements those recommendations
• Suggests creative alternatives that you may not have considered
• Reviews and recommends life insurance policies to protect you
• Assists you in setting up a company retirement plan
• Assists in preparing an estate plan for you
• Persuades you to do the things you know you ought to do, even if you don’t feel like doing them

• Prepares an asset allocation for you so you can achieve the best rate of return for a given level of risk tolerance
• Does due diligence on money managers and mutual fund managers in order to make appropriate recommendations
• Stays up to date on changes in the investment world
• Monitors your investments
• Reviews existing annuities
• Reviews your investments in your company PERA plans
• Reviews and revises portfolios as conditions change
• Guides you through difficult periods in the stock market by sharing historical perspective
• Works with you to improve your investment performance
• Can look inside your mutual funds to compare how many of their holdings duplicate each other
• Converts your investments to lifetime income
• Helps you evaluate the differences in risk levels between various fixed-income investments such as government bonds and corporate bonds.
• Provides research on stocks from both affiliated firm and third parties
• Holds and warehouses stocks, bonds and other securities
• Records and researches your cost basis on securities
• Provides you with unbiased stock research
• Provides you with personal stock analysis
• Provides you with a written sector-based evaluation of your portfolio
• Determines the risk level of your existing portfolio
• Helps you consolidate and simplify your investments
• Can provide you with technical fundamental and quantitative stock analysis
• Gives you strategies for trading options
• Provides you with executive services involving restricted stock and employer stock options
• Provides introductions to money managers
• Show you how to access your statement and other information online
• Shops top rates from financial institutions throughout the country
• Provides access to answers from a major investment firm

• Suggests alternatives to lower your taxes
• Review your tax returns with an eye to possible savings in the future
• Stays up to date on tax law changes
• Helps you reduce your taxes
• Repositions investments to take full advantage of tax law provisions
• Works with your tax and legal advisors to help you meet your financial goals.

Person-to Person:
• Monitors changes in your life and family situation
• Proactively keeps in touch with you
• Remains only a telephone call away to answer financial questions for you
• Serves as a human glossary of financial terms such as beta, P/E ratio, and Sharpe ratio
• Makes sure that the he/she and the firm provide excellent service at all times
• Provides referrals to other professionals, such as accountants and attorneys
• Refers you to banking establishments for loan and trust alternatives
• Provides you with a chart showing the monthly income from all of your investments
• Suggests alternatives to increase your income during retirement
• Listens and provides feedback in a way that a magazine or newsletter writer does not
• Shares the experiences of dozens or hundreds of clients who have faced circumstances similar to yours
• Helps educate your children and grandchildren about investments and financial concepts
• Holds seminars to discuss significant and /or new financial concepts
• Helps with continuity of your family’s financial plan through generations
• Facilitates the transfer of investments from individual names to trust or from an owner through to beneficiaries
• Keeps you on track
• Identifies your savings shortfalls
• Develops and monitors a strategy for debt reduction
• Educates you on retirement issues
• Educates you on estate planning issues
• Educates you on college savings and financial aid options
• Is someone you can trust and get advice from in all of your financial matters
• Is a wise sounding board for ideas you are considering
• Is honest with you
• Saves you time

Guest Blog: Defending Your Fee in an Angry Marketplace

When clients average 9% a year, it’s easy to pay a 1% fee. When they lose money, those fees become harder to stomach. Here’s a four-part action plan for reestablishing your worth and protecting clients from further damage.

It’s not easy being a financial advisor these days. For some, you’re about as popular as members of Congress or the Bush administration. Within the last few weeks, millions of investment clients received third-quarter statements. Those who dared open the envelope found portfolios hammered by the recent market free fall. Trillions of dollars have evaporated from the markets.

Will clients stick with you?

A study released this month by Prince and Associates was not encouraging—at least, not for the wealthiest sectors of the financial services industry. The survey showed that an alarming 81% of investors with at least $1 million in discretionary assets at private banks were planning to pull at least some of their money from their advisors in the wake of Black September and Blacker October. Nearly half said they planned to change advisors and warn others about that professional.

Prince attributed this loss of confidence to the uncertainty caused by the credit crisis, the banking bailout, the market collapse, and the election. The good news in that? Factors such as the personal style and service approach of an advisor and the reputation of the advisory firm can greatly help shape an investor’s attitude. And their willingness to keep paying you, Prince said.

Advisor Beth Blecker, CEO of Eastern Planning in Pearl River, New York underscores the importance of steady service in this rough market: “I am not having any trouble defending my fee with 95% of my clients, but service is the key,” she notes. “I see my best clients every quarter, and I host special volatility-education events and appreciation events. I tell clients this is the time that I really have to earn my fees by keeping them long-term-goal-oriented. We do not believe in timing the market, so it is up to me to keep them invested.”

Taking charge of your message

What can you do now to keep clients happy, defend your fees, and attract new clients? Here’s an action plan for tough economic times.

Go back to the investment policy. When you initially establish an investment policy statement, it can be used to remind clients of potential losses they agreed to accept. This is especially valuable in a down market. An investment policy statement might include a statement like this: “Client X could accept losing 15% in any single year. Over a five-year period, she could tolerably lose 3% annualized.”

When the market falters, you can point back to the risk range outlined in the investment policy statement, as well as to the benchmarks chosen to help put the client’s investment performance into perspective. “It puts in plain English what risks they were willing to take,” said one advisor about his IPS. “It also provides a measurable standard by which we can reasonably be evaluated in a down market.”

Action step: Review clients’ investment policy statements. If you don’t have an IPS process, consider developing one to formally outline your approach.

Host an education summit. Perhaps no time would be more appropriate than now to gather your clients together at your home or office for a special “volatility event” to educate them about your market outlook and how you plan to address the current crisis. An education workshop should include the following elements:

  • A small number of attendees. Unlike a mass-marketed seminar, a client education workshop involves only a select group of your best clients—15 to 30 at the most.
  • Shared interests. When inviting clients to attend your exclusive workshop, choose those who share common interests and concerns. Your knowledge of their unique needs and issues will create a more effective event.
  • Educational purpose. Your education summit should not be tied to a product push. Clients should be able to ask questions and speak their minds. “Since this crisis hit, we have hosted special volatility events with my son, who is a certified financial analyst,” explains Blecker of Eastern Planning. “Clients were very happy that they could ask him whatever they wanted related to the market downturn.” You could bring in your own expert.

Action step: Determine which of your clients to invite. Consider hosting a series over several weeks for small client groups. Saturday mornings often work well. Limit attendance to 30 at the most. Find a guest speaker, if possible, but be sure you remain in charge of the message.

Remind clients about the benefits of fees. Clients don’t pay you a fee just for market performance. And while paying a fee in a down market can be frustrating, clients need to remember all the advantages of fees. Here are a few benefits you can remind them about:

  • Risk management. In a down market, your job is still to manage client risk and optimize their long-term strategic portfolio planning. This service becomes even more important when the market goes down as client confidence is low.
  • Portfolio flexibility. In declining markets, slight modifications to a portfolio can help your clients manage risk. A fee arrangement allows you to fine-tune their holdings without worrying about costs.
  • Constant advice. Paying a fee does not assure a positive return any more than paying for a doctor’s services guarantees the treatment will be successful. Clients pay for the process and the constant attention you give them. As one advisor notes, “Markets go down. This fact cannot be confused with the failure of the consultant.”
  • Excellent service. Clients rely on your service team to answer their questions and handle their requests promptly. Remind clients about the excellent service you strive to provide, that you have the best in the business handling their day-to-day financial needs. Point out that they can reach a member of your team at any time, and emphasize the level of personal service that distinguishes your practice.
  • Tax management. You play an important role in minimizing your clients’ tax bill. Making portfolio adjustments for tax purposes is more easily done under a fee arrangement because you don’t have to worry about transaction costs. Sometimes the tax savings can pay for a year’s worth of fees. A client can also write off your advisory fee, while mutual fund expenses are not deductible.
  • Shared economic interest. Remind your clients that as a result of your fee-based relationship, you’re feeling the pain along with them. One advisor told me his client assets were down 13% last quarter, meaning he just took a 13% pay cut. Your goal is to increase your clients’ wealth, and you share in their success and have every motivation to help them reach their goals.

Action step: If you encounter concerns about your management fee, make it your priority to listen first. Once you have understood and acknowledged the client’s objection, you can respond appropriately with the above advantages of fee-based advisory relationships.

Consider new hedging strategies. Finally, however well you defend your fees, it may be time to take a new investment approach. While focusing on long-term goals and staying invested has long been a mantra for financial advisors, a growing subset of advisors are embracing alternative risk management strategies and hedging to reduce short-term portfolio volatility. They’re basically saying, Forget the long run; we gotta stop the pain now.

“In order to justify your fee, you must bring something new to the table,” argues Otto Federen, an independent registered investment advisor in Lexington, Ky. “Buy and hold equals ‘hope and hold’—and hope is not a strategy.”

Federen completely revamped his investment approach after the 2002 bear market, when he saw fundamentally sound companies and managers beaten down by the market. “We recognized that we had to have downside protection.” He has had his clients in Treasury money funds since February, and he uses some managers who use short strategies.

Thomas Norris, president of NFI Advisors, manages risk with structured accounts comprised of Treasury bonds and call options on the S&P 500 Index to participate in upward swings. His clients have not lost money during the downturn. “If you don’t lose, you don’t have to make it up. I’m not in the market. We’ve protected them on the downside.”

Norris sees his no-risk strategy as the only approach during what may be a rough time ahead. “The average investor has been told to just stay invested, that the market will recover. But look at 1973-74. The market lost 50% of its value. People and advisors were devastated. And over 10 years during the ’70s, the market died slowly.”

And some advisors, recognizing the flat market over the last decade worry about another decade with little forward progress. David Hoelke, CFP, of Focus Financial in St. Paul, Minn. explains: “It’s not the wild swings up and down that concern me. I’m more concerned about a longer-term stagnant period, where clients might only make 2-3% because of a deflationary recession. If all asset classes perform poorly, 2-3% could be strong compared to inflation. “But if I’m taking one of those points as my fee, it might not sit well. I don’t worry about my clients becoming angry, but rather that they become pragmatic and learn that CDs might a safer alternative. And while that’s shortsighted on their part, some clients are frazzled enough that they might not care.”

Action step: Investigate alternative investment approaches on Horsesmouth and elsewhere. Explore the costs and potential advantages of these absolute return strategies.

Senior Editor Nicole Coulter specializes in helping financial advisors manage their businesses more effectively. She has previously written about practice management issues for publications such as Registered Representative and Bank Investment Representative. She holds an MBA from the University of Nebraska at Omaha.