In the summer of 2008, friends Rich Aberman and Bill Clerico came up with an idea for an online payment-processing business. But the duo couldn’t afford to build the technology platform that they envisioned.

So they used free animation software to create a video describing their entrepreneurial dream and emailed it to about a dozen professional investors. They soon raised $20,000 and today their Palo Alto, Calif., start-up, WePay.com, has nearly 40 employees. They also now have some $20 million in venture-capital funding.

Producing the video, which features stick-figure characters and lasts less

than a minute, “wasn’t rocket science,” says Mr. Aberman, 27 years old. Because it was meant just for investors, “it didn’t need to be as polished as a video you’re putting on a website for customers.”

These days, making a video to promote a start-up doesn’t require Hollywood skillfulness or a fat wallet. There are many video-editing programs you can download for little or no cost, such as Apple’s iMovie and Microsoft’s Movie Maker. Plus, entrepreneurs can take advantage of free and widely viewed distribution channels like YouTube.com and Vimeo.com.

Video can be a highly effective marketing tool for a start-up because “sight, sound and motion communicate much better than written copy and static images,” says Bob Gilbreath, author of “The Next Evolution of Marketing.” Audiences are generally receptive to low-budget productions because they’re now commonplace and tend to convey authenticity, he adds.

First-time entrepreneur Adam Johnson recently made a video for his New York start-up, the Juicebox, a company that’s in the process of developing a secure smartphone-charging station for bars, movie theaters and other public venues. He says he got the idea for the product while working as a bartender because customers would often ask to use an outlet to charge their phones.

Mr. Johnson’s video is roughly two minutes long and explains how the Juicebox works. He says a friend who’s a professional filmmaker helped him produce it for free.

The 27-year-old posted the video to Vimeo in January and says he almost immediately began receiving emails from businesses interested in becoming customers. He has secured three dozen pre-orders for his product, which is expected to be ready for distribution in New York this summer.

Mr. Johnson’s best tip for using video: “Don’t make it too explanatory or didactic,” he says. “Show, don’t tell.”

Steffany Boldrini of Mountain View, Calif., has created more than 100 videos for ecobold.com, an online platform for buying and selling environmentally friendly goods. The roughly two-minute-long videos show her reviewing various “green” products, and she often dons a playful costume to inject humor into them. For example, she wears a French-maid outfit for reviews of cleaning products.

“Try to be funny because people love humor and they will come back for more,” she says.

Ms. Boldrini, 29, started her business in late 2009 with just a few hundred dollars in savings, and used part of it to buy a $600 video camera.

Ms. Boldrini says she spent a few hours every day for months searching Twitter for users whose profiles or “tweets” indicated an interest in organic and nontoxic goods. She then followed their posts, hoping they would follow hers in return—and many did. She used a similar approach with Facebook and says her social-media connections began to pay attention whenever she posted a link to one of her videos.

“It took a lot of work,” Ms. Boldrini says, but the views her videos garnered were soon averaging about 5,000 hits within six months of getting posted to her company website and YouTube. Her most popular video boasts nearly 200,000 views.

Of course, a video might be seen by far more eyeballs if it goes viral—meaning it spreads like wildfire across the Internet. But since this happens rarely, entrepreneurs shouldn’t spend all their time and energy making a video, nor should they expect going down this path to turn their business into an overnight sensation.

“You can count the number of business videos that have gone viral on one hand,” says WePay’s Mr. Aberman.

—
sarah.needleman@wsj.com

By M.P. MCQUEEN

If you’ve been in the habit of shopping around for a new term-life insurance policy every few years, you may want to reconsider that strategy: After years of falling premiums, many insurers are raising prices on term policies.

Premium increases averaging about 5% to 15% started in January and are sweeping through the industry. One reason is that higher capital and reinsurance costs for insurance companies linked to tighter credit markets are making it more expensive for insurers to maintain needed cash reserves. Another is that insurers are receiving lower returns on their investments, putting additional pressure on them to raise money.

For consumers, that means the era of counting on lower rates five or 10 years down the line could be over for a while. It also means locking in premiums before they go up.

Steve Johnson, a 51-year-old business consultant in Lilburn, Ga., was trying to beat an impending price increase when he rushed in his application to online insurance broker AccuQuote.com for a new $500,000, 10-year term life policy from ING Groep NV’s

ReliaStar Life Insurance Co. in April.

But a series of canceled appointments delayed the necessary medical exam by several weeks, Mr. Johnson says. In the end, his application arrived a day late, and his annual premium rose to $864 from the $744 he had been quoted.

Unlike many other forms of life insurance, including “permanent” whole and universal life, traditional term life — the least-expensive type of individual life insurance — doesn’t include a savings or investment component and pays a death benefit only if the policyholder dies within a specific time period.

“I think we have pretty much bottomed out on how low life-insurance [prices] can go,” says Donald W. Britton, chief executive officer of ING’s U.S. insurance division. ReliaStar and other ING subsidiaries are raising term-life insurance rates an average of 5% this year, Mr. Britton says, “primarily driven by our cost of capital, which is much, much more difficult to get and more expensive than it was a year ago and prior.”

Other companies that have announced recent or impending price increases for new term-life policies include Prudential Financial Inc.

— which raised premiums an average of 4% for term-life insurance policies on May 1 — and Lincoln National Corp.’s

life-insurance-issuing units. American International Group Inc.’s

American General Life Insurance Co. and United States Life Insurance Co. subsidiaries are raising rates by as much as 35% for customized “return of premium” term insurance, a spokeswoman says, but not for ordinary term.

Return-of-premium policies promise to return all or most of the premiums paid at the end of the term if the owner is still living and the policy is still in force. A relatively new product, return of premium has been gaining in popularity in recent years despite costing about 50% more than a regular term policy. Some insurers have said they plan to discontinue sales of the product. Return-of-premium policies now account for 5% to 10% of sales at AccuQuote, the company says.

Before the financial crisis erupted last year, term-life rates had been falling for two decades largely as a result of improved mortality rates and Internet sales. Premiums for costlier permanent insurance are also rising.

The Start of a New Era?

Economists and industry experts aren’t certain whether the price increases mark the start of a new era of rising rates or are merely a temporary blip. Prices also rose shortly after Jan. 1, 2000, when most states imposed new regulations requiring insurers to keep larger cash reserves for longer-term level-premium policies. Many insurers raised premiums and some stopped selling 30-year-term policies after the new rules took effect. But prices for many new term policies rolled back again within a couple of years.

Robert Bland, CEO of Insure.com, a national online insurance brokerage, says more than three-quarters of the 30 companies whose policies his brokerage sells have already either imposed or announced impending premium increases for term life, and that he expects most others to follow suit by the end of the year. Premiums for some age and risk groups and policy amounts also are increasing sharply, he says.

One company, for example, raised premiums 57% for a $250,000 15-year-term policy for 35-year-old males in the best health class, but it raised premiums only 36% for a $1 million policy. The premium for the same male buying a $250,000 30-year-term policy from the same company increased 10%, but only 1% for a $1 million policy.

Not all companies have raised prices or have raised them uniformly, so it pays to comparison-shop. Northwestern Mutual Life Insurance Co., for example, hasn’t raised rates, a spokeswoman says. Some other mutual companies — those owned by the policyholders — and publicly traded insurers also say they haven’t raised rates.

In recent years, insurers also have been tightening underwriting requirements and taking a harder line on risk factors such as obesity and high blood pressure, industry sources say, prodded by tougher requirements from reinsurers.

Until several years ago, applicants might have been forgiven, say, a little extra weight and given a lower rate. That’s no longer the case, says Dave Evans, senior vice president of the Independent Insurance Agents & Brokers of America. He says only 6% to 7% of applicants qualify for the very lowest rates.

Changing Buying Habits

Mr. Bland says consumers, conditioned by years of falling prices, may have to change their life-insurance buying habits. “A lot of people would think they could shop around every five years. That game is going to come to an end,” he says.

Rising premiums mean there’s less incentive to change policies often. Not only will you be older, but premiums may be higher overall because of market changes, and insurers may take a harder stance on your cholesterol or blood pressure than the last time you applied for a policy. If you think you need coverage for 20 years, you’d probably be better off now buying a 20-year level-term policy than buying a 10-year policy and thinking you will buy another one 10 years from now, Mr. Bland says.

Insurers generally won’t raise premiums on a policy once they have received a completed application, so agents are urging shoppers to get new applications in quickly. The application process generally takes at least 30 days.

Write to M.P. McQueen at mp.mcqueen@wsj.com

Printed in The Wall Street Journal, page D1

By SHIBANI MAHTANI

SINGAPORE—Facebook Inc.

founder Mark Zuckerberg is one of the world’s most famous chief executives. His former business partner and friend, Eduardo Saverin, is big in Singapore.

Mark Zuckerberg and six others own nearly half of Facebook’s stock. Marcelo Prince explains what Zuckerberg, Sean Parker, and even Goldman Sachs stand to gain when the company goes public in May. Photo: AP.

The Brazilian-born billionaire’s skirmishes with Mr. Zuckerberg over the future of Facebook were dramatized in the 2010 film “The Social Network,” which portrayed Mr. Saverin as a naive entrepreneur.

Mr. Saverin was squeezed out of Facebook early on, and found his stake in the Internet juggernaut diluted to less than 10% from 34%. Today, after more dilution and sales of some of his shares, his stake is about 2%, according to a person familiar with the matter.

But 2% can go a long way, given that Facebook filed documents Thursday to go public with a valuation of up to $96 billion. It can go especially far in Singapore, a financial center better known for banning the sale of chewing gum than for a thriving technology scene.

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Since his arrival in 2009, the 30-year-old Mr. Saverin has attracted intense interest here. Singaporeans avidly track his nocturnal social habits. Many hoped he would fund local tech start-ups, but so far his local investments, which include a cosmetics firm, have been limited.

Mr. Saverin is regularly spotted lounging with models and wealthy friends at local night clubs, racking up tens of thousands of dollars in bar tabs by ordering bottles of Cristal Champagne and Belvedere vodka, according to people present on these occasions. He drives a Bentley, his friends say, wears expensive jackets and lives in one of Singapore’s priciest penthouse apartments.

Mr. Saverin didn’t respond to multiple interview requests.

Other Facebook founders have followed a somewhat different path, at least publicly. Mr. Zuckerberg is most often seen in public walking his dog, and continues to wear his signature zip-up hoodies and drive an Acura. Fellow Facebook co-founder Dustin Moskovitz launched a work-collaboration start-up and has pledged, along with Mr. Zuckerberg, to give half his wealth to charity. Chris Hughes worked for Barack Obama’s presidential campaign and recently bought a controlling stake in the New Republic magazine.

In Singapore, Mr. Saverin is a Kardashian-like figure, with scores of fans hoping for a sighting. Local websites have set up forums with threads entitled “Where does one meet Eduardo Saverin in Singapore?” Bloggers and journalists have written long posts after spending mere seconds with the billionaire.

Singapore’s Tatler, a society magazine, added him to its “300 List,” which celebrates the biggest power players here, including a shipping-container magnate. Mr. Saverin’s Facebook posts, which range from updates on his investment company to pictures from travels across the region and nostalgic reflections on Facebook itself, get thousands of “likes” and comments, and hundreds leave messages hoping to meet the man in person.

“Eduardo, I need to talk to you sir. For real! Hit me up,” said one Facebook user on Mr. Saverin’s public Facebook page.

Mr. Saverin, who hails from a wealthy Brazilian family, has never fully explained why he moved to Singapore in late 2009, but he has mentioned its strategic location and business-friendly environment in his few public appearances. Those close to him say he once stopped off here while traveling in Asia and liked it.

The city-state has tried to become an Internet-technology hub, with limited success. But it is increasingly known as a playground for the rich, with the world’s highest percentage of millionaires, and its glitzy night life.

Its tightly controlled local media is largely free of the tabloids that hound celebrities in places like the U.S. Local press reports have referred to Mr. Saverin as a “Facebook legend,” “nice and humble” and “generous” when spending on his friends in nightclubs. Night-life magazines refer to him as one of “Singapore’s hottest partygoers.”

Though Mr. Saverin speaks at select conferences, he is extremely media-shy, often declining to talk to the media.

Mr. Saverin has invested in a number of start-ups, mainly back in the U.S., including Shopsavvy, a price-comparison mobile application; Qwiki, a multimedia video website; and Jumio, a mobile-payments start-up. He put more than $6.5 million each into those companies.

Mr. Saverin’s most notable local investment is in Singapore-based Anideo, headed chiefly by Andrew Solimine, a longtime friend. The company has developed a video-streaming application, Denso, that specializes in selecting videos based on a user’s personal taste.

Although many of his investments are viewed as promising, none has been nearly as successful as Facebook, to the disappointment of local techies who had hoped his presence would kick-start the country’s entrepreneurial scene.

“Eduardo doesn’t invest in much. He doesn’t invest in Singapore companies,” grouses John Fearon, CEO of Singapore start-ups dropmysite.com and dropmyemail.com that back up emails and website content using cloud computing. He says he didn’t ask Mr. Saverin for money. “He doesn’t set up his stall and say, come to me for investment.”

Some of Mr. Saverin’s other projects have been less conventional, including a cosmetics line launched in 2010 by Rachel Kum, Singapore’s 2009 entry in the Miss Universe pageant. Mr. Saverin invested an undisclosed sum in the company, according to people familiar with the matter. He appeared in a TV news report about the line’s debut in footage showing him flanked by models.

Government and corporate leaders routinely invite him to speak at conferences and other functions, but he doesn’t have a great record of showing up, though, organizers say.

Mr. Saverin was invited to judge pitches for start-ups last June at Echelon 2011, a conference sponsored by Microsoft Corp.,

Amazon.com Inc. and others. “It was exciting because “The Social Network” movie had come out, [and] there was a buzz about him being in Singapore,” said Joon Ian Wong, who then worked for E27, the event’s organizer. “Start-ups wanted to…see Saverin in the flesh.”

But hours before he was due onstage, Mr. Saverin canceled via text message, saying he wasn’t well. People familiar with the matter say he has canceled other appearances at the 11th hour.

None of that has dimmed his star in Singapore. Mr. Saverin’s activities are good for the city-state, says Ash Singh, an investor and the CEO behind “Angel’s Gate,” an Asia-based reality-TV series focusing on investment and entrepreneurship. “Is Eduardo an entrepreneur? I don’t know,” he says. “But he did well for himself, he has come here, there is a movie about him, and people aspire to be like him.”

—Sam Holmes and Geoffrey A. Fowler contributed to this article.

A version of this article appeared May 4, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: The Other Facebook Founder.

By JOE LIGHT

After years of hype and occasional blowups, the “peer-to-peer” lending market, which connects borrowers with mom-and-pop lenders, is starting to attract professional investors.

The allure? Fat returns. At a time when interest rates are near historic lows, peer-to-peer firms such as Prosper Marketplace and LendingClub Corp. say investors can generate annual returns of 10% or higher by making loans, or pieces of loans, to their fellow citizens.

What’s more, the firms say investors who spread their bets wide enough are unlikely to lose money.

But is the market safe enough for ordinary people?

The short answer: It depends. There are huge risks, but if you can tolerate the uncertainty of lending money to strangers, some with spotty credit histories, you can generate returns much better than can be gotten from most government or corporate bonds.

The choice, experts say, boils down to whether you use the returns on the investments as a key source of investment income or merely a higher-yielding sliver of an otherwise safe bond portfolio. Experts advise the latter.

“It’s not something that should be for money that can’t handle risk,” says William Jordan of William Jordan Associates, an Orange County, Calif., wealth-management firm. “But used properly, you can get much better returns than in other areas of the market.” Mr. Jordan last October launched a fund that invests solely in Prosper loans.

Roosevelt Robinson III of Kettering, Ohio, who owns a car dealership, began investing in Mr. Jordan’s fund last fall, allocating almost 10% of his portfolio to loans made through Prosper. He says his investment has produced more than a 12% average annual return.

“You’ve always got risk involved, but given the alternatives, it looks pretty darn good,” he says. “There’s a zillion banks that do lending to consumers all the time, and they seem to be very profitable.”

How it Works

Peer-to-peer lending services such as Prosper and Lending Club launched in the mid-2000s with the idea of letting investors make small loans directly to consumers. Borrowers would pay less interest than they would on typical credit cards, while lenders would get higher returns than they would in other yield-producing assets, such as government bonds.

Other peer-to-peer lenders in the U.S. haven’t gotten traction among lenders or borrowers.

Lending Club and Prosper say most borrowers use the services to

pay off high-interest credit-card debt, though they can borrow money for any number of reasons, such as to build a swimming pool. The loans are unsecured, meaning there isn’t collateral for lenders to keep if the borrowers don’t pay.

Lending Club arranges loans for as much as $35,000 for as long as five years, while Prosper’s loans can last up to five years and run up to $25,000.

Tim Foley

The lending experience is much like running a stock screen. After linking a bank account, investors can browse available notes and screen for certain attributes, such as how long the loan would last, the interest rate and the borrower’s debt-to-income ratio and FICO credit score, among other attributes. Lending Club and Prosper also assign a rating based on the borrower’s credit-worthiness and the size and length of the loan.

Inside each listing, the borrower also can describe what he is planning to use the money for, and potential investors can ask questions. Though the borrower might be requesting several thousand dollars, investors can fund just a portion of the loan. After the loan is completely funded, investors will start to receive their share of monthly principal and interest payments.

Big Players

Until last year, most peer-to-peer loans came from ordinary—and daring—investors. But big institutions are beginning to dabble in the market as well.

In the past 18 months, Lending Club has gathered 30 institutional investors, including hedge funds and wealth-management firms, and boosted its institutional assets from nothing to about $170 million, which accounts for 40% of its outstanding loans, according to the company.

Lending Club announced Thursday that former Morgan Stanley

chief executive John Mack has joined its board.

Prosper’s institutional assets have grown from $2 million a year ago to about $40 million now, or about half of its total loans, says Joseph Toms, Prosper’s chief investment officer.

La Francaise AM, a French asset manager with more than €35 billion ($46 billion) under management, started investing in Lending Club loans last summer and now has around €10 million invested, says La Francaise chairman Xavier Lépine.

Soundpost Partners, a New York-based hedge fund that wouldn’t disclose its size, increased its allocation to Lending Club loans twice in the past year and now has more than $2 million invested on the platform, says David Roeske, an investment analyst for Soundpost.

Yield Play

The main driver, the investors say: higher returns. Ultrasafe five-year U.S. Treasurys yield just 0.9%, while, at the other end of the risk spectrum, U.S. high-yield, or “junk,” corporate bonds, with a duration of four years, have yields of 7.33%.

By contrast, three-year loans rated B1 by Lending Club, whose borrowers typically have a FICO credit score above 720, pay a 10% average annual interest rate, according to the company. Once defaults are taken into account, the average annual return from Lending Club’s B1-rated loans falls to about 8%.

A Lending Club borrower from San Francisco, for example, in early April asked for a five-year, $18,000 loan to pay off his or her credit card debt. The borrower had a FICO credit score between 714 and 749, no delinquent accounts, and a revolving credit balance of $17,770. Other Lending Club investors already had funded 98% of his loan and would earn 12.12% annual interest from the borrower.

On the same day, a Prosper borrower from Georgia wanted a five-year, $15,000 loan for an investment property. Prosper said he had a credit score between 740 and 759, four credit inquiries in the last six months, and $3,047 in revolving credit. Investors would make 17.45% if he kept up his payments. More than 170 investors had contributed to the loan, many offering only $25.

Lending Club and Prosper run individual accounts for wealthy investors with screens of credit criteria—such as credit scores, income and other debt—specified by the investors. Lending Club a year ago also launched two funds with pools of loans that “accredited” investors—those with a net worth above $1 million or income above $200,000 for an unmarried person—can buy into, one diversified among all its loans and one with only its highest-rated loans.

“It’s a tough world out there, Lending Club CEO Renaud Laplanche says. “The common theme among our clients is that they want to generate yield.”

Big Risks

The downside to the higher yields: much more risk.

Since Prosper and Lending Club are only a few years old, some planners say they are wary of the companies’ default projections. The prospectuses note that the rates could change over time.

Lowell Lombardini-Parker, a financial adviser with Seattle-based wealth manager Merriman LLC, says the short history of peer-to-peer loans makes him wonder if investors should make them part of a portfolio. “The high rates they offer are a red flag,” he says. “If you’re getting something that seems too good to be true, it probably is.”

Though executives for Lending Club and Prosper say well-diversified investors in higher-quality loans rarely lose money, institutions that have invested in the loans acknowledge that until the companies have built a longer track record, it is difficult to pinpoint how the loans should be used in a portfolio.

Mr. Jordan, the wealth manager, says most clients look at peer-to-peer as an alternative to junk-bond funds. But unlike high-yield bonds, which sometimes recover some money in the event of a default, Prosper and Lending Club loans offer investors almost no chance of recovery.

So far, the companies have experienced only one recession. According to Lendstats.com, which tracks peer-to-peer firms, Prosper loans issued in 2007 lost 6.8% annually. Mr. Toms, the chief investment officer, says Prosper in 2009 changed its ratings methodology.

Lending Club says its loans issued in 2007 had a 3% average annual return, and that its loans have never had a negative year.

By comparison, between 2007 and 2009, the Vanguard High-Yield Corporate Bond Fund

(VWEAX) returned about 12%.

Another risk: lack of liquidity. It is difficult to get your money back before the loans mature, notes Trevor Welch, partner with Praesideo Management LLC, an Ogden, Utah-based registered investment adviser with about $5.4 million invested in Prosper loans.

Online brokerage Foliofn lets Lending Club and Prosper investors buy and sell their loans on the secondary market, but it is thinly traded, Mr. Welch notes.

Building a Portfolio

If you decide to start a portfolio of peer-to-peer loans, its best to test the waters with the company’s highest-quality loans, says Kenneth Lemke, publisher of Lendstats.com.

For Lending Club, that means buying only loans that are grade A or B (on an A through G scale). Borrowers with those grades tend to have a FICO score of above 720, on a scale of 300 to 850, and other qualities, such as a long credit history, that make it more likely the borrower will make good on the loan.

On Prosper, the most conservative loans are rated AA or A and tend to have credit scores of 720 and up.

Mr. Jordan says that in a typical portfolio that has a 40% allocation to bonds, investors should devote no more than 10% to peer-to-peer loans. In most cases, investors are most comfortable with a 4% to 8% allocation, he says.

Prosper and Lending Club allow you to fund only a portion of a borrower’s request, which means you can spread your risk over hundreds of loans if you wish. According to Prosper, since 2009 investors with at least 100 loans in their portfolio have never lost money.

Investors who have put money into only a few loans, on the other hand, have lost all of their money, according to Prosper.

Mr. Lemke also suggests investors stick to loans from borrowers who have had three or fewer credit inquiries in the past six months and who report that they have credit-card debt that they are looking to pay off.

“At first, you should start conservatively,” Mr. Lemke says. “Don’t go for the big money right away. If you diversify into the most conservative loans, it’s really hard to screw up.”

A version of this article appeared April 14, 2012, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: Would You Lend Money to These People?.

By ARDEN DALE

Financial advisers and their clients are starting to plan for, if not yet act on, a possible jump in taxes on dividends.

Dividend-producing stocks have had a special attraction among investors in recent years, in part because of the lower-than-usual tax rates dividends have enjoyed for much of the past decade. Those low rates gained even more luster as the stock market tanked—driving up the dividend yields—while interest rates on savings accounts have been so low. A 2% dividend yield also looks more interesting to investors than it did before U.S. bond yields declined last year and remain near historical lows.

Increases in taxes on dividends, capital gains and ordinary income all are currently planned, but dividends may be seen one of the biggest changes. Before a series of series of tax cuts launched by then-President George W. Bush in 2003, dividend income was taxed the same as ordinary income. Under the cuts, it was treated like capital gains, with a tax rate that shrank to 15%—the lowest since 1941. That arrangement was to expire in 2010, but was extended then for two more years. In 2013, the top rate on capital gains is set to go to 20%.

Taxes on dividends, now at 15%, could rise to as high as 39.6% next year—an effective 164% increase for some wealthy people in the highest tax bracket. While lawmakers could change that plan, some advisers say it isn’t too soon to start talking to clients about changes they may need to make to their portfolios.

An additional 3.8% surtax on dividend income and capital gains could also kick in for some wealthy investors.

Michael Joyce, a financial planner in Richmond, Va., is working up a list of his clients with a lot of dividend-paying stock and plans to review possible strategies. One could be shifting dividend stocks from taxable to tax-deferred vehicles like individual retirement accounts, he said, while another could be replacing them with municipal bonds.

Mr. Joyce won’t actually recommend specific moves until later this year. There is too much uncertainty, he said, about whether Congress will keep those tax rates from rising so sharply. Like other advisers, he has to play a guessing game for now.

Any strategy needs to weigh capital gains carefully if it is to include selling dividend payers, said Eve Kaplan, a fee-only adviser in Berkeley Heights, N.J., who manages $23 million. She said she has already fielded questions from a few clients about a possible rise in dividend taxes.

It will make less sense to earn dividend income in taxable accounts from 2013 onward, according to Ms. Kaplan, since the tax rate on it will essentially be the same as in a tax-deferred account. And, any move out of dividend-paying stocks in taxable accounts could trigger capital gains.

One client of Ken Weingarten, an adviser in Lawrenceville, N.J., has a client with that very situation. He said a key to any dividend strategy is how the client will be positioned financially in the future.

Mr. Weingarten’s client, a high-earning architect in his early 50s with a wife and two children, is saving a lot in a taxable account invested in U.S. and international large-cap stocks. Selling now to get investments into a tax-deferred account would mean some $11,000 of capital-gains tax. It would take around seven years for dividend taxes to equal the capital-gains tax that he would have to pay this year.

The client’s plan is to retire from his job in just a few years and lead a simpler life. His income will likely drop significantly, and the tax rate on his income, dividends then included, will be much lower.

So what will Mr. Weingarten advise? Nothing, yet.

“As the hit song from Asia goes,” Mr. Weingarten says, referring to the rock band, ” ‘only time will tell.’ “

By JOE LIGHT

Who needs mutual funds, anyway?

Taking a page from individual investors, many financial advisers are giving up on actively managed funds in their quest to beat the market.

Instead, they are turning to “managed ETF portfolios,” which eschew stock picking in favor of strategically moving allocations among various passively managed exchange-traded funds. Some advisers build the portfolios on their own, but a growing number are outsourcing the work to registered investment advisers.

Though the ETFs that underlie the portfolios often carry lower costs than the mutual funds they replace, the portfolios add a new layer of fees that sometimes eats up the savings. Most of them also have short track records that are difficult to evaluate, analysts say.

“This area is so new that it’s still like the Wild West,” says Dave Nadig, director of research at IndexUniverse, an ETF research firm.

Advisers usually build managed ETF portfolios with commonly traded ETFs that track broad indexes. For example, the Conservative Risk Based Core portfolio, run by Innealta Capital, holds SPDR Barclays Capital High Yield Bond, Vanguard Intermediate-Term Corporate Bond Index and SPDR S&P 500,

among other investments.

Much like managers of tactical asset-allocation mutual funds, ETF portfolio managers change the allocations to take advantage of what they think are market opportunities.

Almost a third of the strategies tracked by investment-research firm Morningstar

are less than three years old. Assets in managed ETF portfolios rose 43% to about $27 billion in the year ended Sept. 30, 2011.

The biggest player is Windhaven Investment Management, with assets of nearly $7.1 billion, according to Morningstar.

Investors should consider a number of factors before signing on to a managed ETF strategy, says Andrew Gogerty, ETF managed-portfolio strategist at Morningstar. For one, because they are asset-allocation strategies, it is difficult to choose the proper benchmark to compare them to, he says.

For example, the Mench Aggressive Equity portfolio, with $6.5 million under management, invests in U.S. stock ETFs and makes short-term tactical bets, according to Morningstar. That would make a U.S.-based stock index, such as the broad-market Russell 3000, an appropriate measuring stick for the fund, Mr. Gogerty says.

For strategies that invest in a range of asset classes, such as bonds and commodities, investors and advisers should come up with a more-balanced benchmark, says Jonathan Boersma, executive director of Global Investment Performance Standards for the CFA Institute.

A managed ETF portfolio meant for risk-averse investors, for example, might be compared with a portfolio allocated 40% to an S&P 500 ETF and 60% to a bond index ETF, he says.

As with mutual funds, investors should pay close attention to fees.

Someone who invests with an adviser who outsources the portfolio to another firm could pay four different layers of fees: one from his primary adviser, another from the portfolio manager, one from the underlying ETFs and another for the portfolio’s transaction costs, says Rick Ferri, founder of Portfolio Solutions, an investment adviser in Troy, Mich.

The combined fees could run to 2% or more—several times higher than if you invested directly in ETFs.

Some investment advisers have moved clients from mutual funds—on which they already have paid a commission—to the managed ETF portfolios, Mr. Ferri says. While the lower expense ratios on the ETFs make them look cheaper, the additional fees mean that clients actually are worse off.

“The probability that a model ETF manager outperforms after all fees is remote,” he says.

A version of this article appeared March 31, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: Going Passive, Aggressively.

By LAURA SAUNDERS

Uncertainty over the fate of the looming 3.8% tax on investment income is fueling new focus on a trusted tax maneuver: the “backdoor” Roth individual retirement account.

The move allows people to transfer money from taxable accounts to a Roth IRA, which earns tax-free income.

Some eligible taxpayers who act before April 17 can put up to $12,000 per individual, or $24,000 per couple, into such accounts—by making contributions for both the 2011 and 2012 tax years.

“We’re recommending them to all our clients, especially with this tax pending,” says Brian Kohute, a CPA and planner at HJ Wealth Management in Plymouth Meeting, Pa. “It’s almost a “no-brainer,” he says, because you don’t have to take a big one-time tax hit to get assets into a tax-free account.

The 3.8% tax, set to take effect in 2013, was enacted to help finance the 2010 health-care overhaul. It is an extra levy on most joint filers reporting more than $250,000 of adjusted gross income ($200,000 for singles) that applies to investment income from capital gains, dividends and rents, among other sources. But it doesn’t apply to municipal-bond income and qualified payouts from Roth IRA accounts.

The Supreme Court last month heard arguments on the constitutionality of the 2010 health-care overhaul. It is expected to rule in June.

The 3.8% tax, along with scheduled tax increases in 2013, make Roth IRAs the “gold standard” now, experts say. Unlike with regular IRAs, the payouts from Roths are usually free of federal tax. Withdrawals don’t trigger higher Medicare premiums or taxes on Social Security payments, and there aren’t mandatory withdrawals at age 70½.

Roth IRAs can be hard to get, however. There are income phase-outs for direct contributions to a Roth account: $169,000 for joint filers in 2011 ($173,000 in 2012) and $107,000 for single filers ($110,000 in 2012). Taxpayers also can convert regular IRAs to Roth IRAs, but the transfer is often fully taxable. Many are reluctant to write that check, fearing lawmakers will rescind the Roth benefits.

That is where backdoor Roth IRAs come in. Taxpayers stymied by income limits are still allowed put up to $5,000 a year ($6,000 for those 50 and older) in a “nondeductible” IRA, as long as they are younger than 70½ and have earned income at least equal to the contribution.

There isn’t a tax deduction for the contribution, but the law allows owners to convert such accounts to Roth IRAs. IRA expert Ed Slott says there isn’t an official waiting period; he suggests a couple of weeks.

Tax is due only on the earnings in the nondeductible IRA between setup and conversion. Donna Skeels Cygan, a planner at Sage Future Financial in Albuquerque, N.M., suggests keeping assets in a money-market fund in the interim.

There is a big caveat: Backdoor Roths don’t work well for people who also have large traditional IRAs, say from rolling over a 401(k) plan. That is because taxpayers can’t cherry-pick one account for conversion. Instead they must lump all IRAs together and prorate the amount converted.

The result can be a large tax bill. For example: You have $95,000 in a regular IRA and $5,000 in a nondeductible IRA. If you convert $5,000 to a Roth IRA, then 95% of the converted amount, or $4,750, is taxable because it is deemed to be from the regular IRA—no matter which account it is from.

To avoid the proration problem, Natalie Briaud Pine, a planner in College Station, Texas, suggests taxpayers roll regular IRAs their 401(k) plans, leaving only the nondeductible IRA to be converted. Such transfers aren’t taxable. This works if the plan allows rollovers—as many do—and investment choices and fees are reasonable. Remember: It is harder to get money out of a 401(k) in an emergency.

Ms. Cygan is reminding clients who don’t already have a backdoor Roth that they can make two contributions this year—one for 2011 (until April 17) and one for 2012: “Just write two checks, and note that one is for each year.”

What if a taxpayer needs money from a Roth account? Withdrawals from backdoor Roths within five years of conversion are usually subject to a 10% penalty unless the owner is 59½ or older. Each conversion carries a five-year limit.

The Internal Revenue Service hasn’t raised any red flags on backdoor Roths that are properly reported on form 8606. According to a spokesman: “The law is pretty clear on this issue.”

Write to Laura Saunders at laura.saunders@wsj.com

A version of this article appeared April 7, 2012, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: Time for a ‘Backdoor’ IRA?.