COMMENTARY ON ECONOMIC AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST 0626414
REGISTERED INVESTMENT ADVISER
FLAWED PLANNING (Investment Advisor, Bob Curtis ) Where does financial advice often go wrong? Financial planning has had this great boom and with all the positive developments, I am convinced we have seen some real negatives as computer processors have become faster and software has become more sophisticated. As an industry, and this goes back to the Certified Financial Planner approach to planning, we have become completely enamored with the generation of numbers, with pretending we can generate accurate numbers out into the future. So much of the effort in planning is centered on the idea that, if we just get more data and smarter, faster computers, we’ll have better plans. That’s not true. We’re trying to predict the unpredictable. More data, more assumptions, more moving parts in a financial forecast don’t add to the usefulness of results. Think about a 30-year plan. I can assure you, almost every assumption we make, by the end of the plan, will be inaccurate. It does not mean that they are bad assumptions or that you should not make assumptions. It means that we should make as few assumptions as needed and focus on the stuff that really matters.
Give me an example of where advisors are so in love with their data that it obscures the bigger picture. Take returns. When you are planning for long-term retirement, one of the things with the most impact on your plan will be returns. Over 30 or 40 years, small changes in returns have huge impact. The best you can do is pick a portfolio and make some estimates about how it will perform. If we predict a return of 8% annually and the client gets close to eight, we’re doing great. But what planners often do is input every stock, every mutual fund, and every bond and predict what each of those securities will do over 30 years, with growth rates, dividend yields, tax treatment, sequences of spending the stocks versus the bonds and other complex calculations. That’s a different level of detail. It actually makes the end result of the plan less meaningful because you create this set of assumptions for things you cannot possibly predict with accuracy.
PURCHASE LTC
Age Monthly Total Premiums Amount Saved if policy 35 years had been purchased at age 45
45 $63 $26,460
55 $152 $45,600 $19,140
65 $265 $68,940 $42,480
KNOWLEDGE? There are some 426 life insurers selling thousands of different products in most states and they only give pricing data to their licensed agents, and require a minimum sales production to be licensed.
So if they don’t know what they are selling, you sure won’t know what you are buying. Caveat Emptor
ETHICS: (Scott Simon) Ethical malfeasance occurs when an investment manager does something deliberately or conceals it (the manager knows that it's too drunk to drive, but drives anyway). For example, consider a manager who invests intentionally at a higher level of risk than the client chose without informing the client and then subsequently generates a higher return than expected. The average return that is achieved over time exceeds that for investments at the client's selected level of risk. The manager attributes the excess return to its superior investment skill
Ethical misfeasance occurs when an investment manager does something by accident (the manager really believes that it's sober enough to drive). For example, consider the manager who can't manage cash properly or delays converting cash into investments. This incompetence causes the client's money to sit and forego expected return since it is exposed to a lower level of risk than the client selected. Thus the manager does not know what he is doing and should not be managing money.
HEALTHCARE: (Wharton) RAND Corp., the Santa Monica, Calif.-based think tank, has estimated that people get the care they need and only the care they need just 50% of time,
There is accumulating evidence that “excess quantity of care in the U.S. is actually overdosing the population with respect to their health outcomes.” Evidence-based medicine can help redress this problem by guiding appropriate treatment. Where there are more cardiac surgeons, for example, there is greater utilization of their services, creating a “misuse problem”. There is also an “under-use problem” in which physicians do not treat medical ailments as aggressively as best practices recommend. Individuals suffering myocardial infarctions, for instance, are reportedly put on beta blockers only 50% of the time. The use of evidence-based medicine can reduce this variation on the supply side.With 42 million people uninsured – 82% of whom are working – their healthcare costs are driving up overall costs. According to studies, 50% of health status – what makes people ill or well – is determined by health behavior, such as whether or not a person smokes or wears a motorcycle helmet. Another 20% of health status is attributable to environmental factors such as living in an area with clean air and clean drinking water, 20% to genetics and 10% to access to the healthcare delivery system.
Of the $1.4 trillion spent annually on healthcare, 80% is devoted to that final 10% that determines people’s health status; only about 4% is devoted to educating people about how to improve their health behavior. $150 billion is spent annually to treat smokers and $117 billion to treat obesity
FUND FEES (Zero Alpha Group) U.S. investors in equity mutual funds are paying $17.3 billion in hidden mutual fund trading costs that are not reported openly in the stated expense ratios of mutual funds. trading costs were, on average, 43.4 percent as large as reported mutual fund expense ratios. For many mutual funds, these costs of trading exceed stated expense ratios. According to the study: “46 percent of all small cap funds have “all-in” trading costs that are higher than the annual expenses investors pay. 21 percent of mid cap funds fall into that category as do 7 percent of all large cap funds. In the small-cap category, 17 percent of all funds have implicit trading costs that are twice the level of annual expenses.”
growth funds have higher than average trading costs as a percent of annual expenses: The growth funds are broken down into large cap growth (with trading costs averaging 43.1 percent of stated expense ratios), mid-cap growth (86.0 percent), and small-cap growth (123.2 percent). Hidden expenses for value funds are lower than with growth funds.
One of the starkest conclusions from the study was the difference in trading costs between index funds and actively managed funds. The total trading costs of active funds were 0.48 percent per year. The trading costs of index funds averaged 0.064 percent per year. Study author O’Neal said: “That investors in actively-managed funds incur portfolio trading costs that are over seven times that of index fund investors is another in the long line of reasons for investors to favor index funds.”
RETIREMENT HEALTH CARE: (Health Affair) Workers eyeing early retirement expect to have health insurance coverage, even though few have given much thought to how that coverage will be paid for. Almost two-thirds (64%) of the workers planning on retiring before age 65 report they would be covered through their own or their spouse’s employer or union. Only 22% of people ages 45–54 and 29% of those ages 55–64 said that they had given a lot of thought to how they would pay for health-care services not covered by Medicare.
I have a couple clients right now that will have to budget these costs. It may reflect if they can take early retirement simply because it may cost too much.
OFFSHORE TRUST FALLACIES (Rob Lambert, Asset Protection Corporation)
Fiction 1: YOU NEED TO PUT YOUR MONEY WITH A FOREIGN TRUST COMPANY AND MOVE IT OFFSHORE
FACT 1: In most cases protected assets remain in the United States. You should NEVER trust a foreign trustee (or anybody else) with your hard earned money. If somebody suggests that you have to "trust" somebody else with your hard earned savings: RUN.
Fiction 2: WE'LL ENCUMBER YOUR PROPERTY AND THAT WILL PROTECT IT
FACT 2: If some asset protection expert suggests that you encumber your assets with a phony loan from Aunt Matilda or any related entity you are in the hands of a novice. This is a popular technique which doesn't work (but it will cost you a lot of money and cause trouble).
Fiction 3: ASSET PROTECTION WILL SAVE YOU TAXES
FACT 3: Asset protection planning will not save you income taxes. Further, if a practitioner suggests that the IRS can't find or tax an offshore account they are advising you to commit a crime. Stay away from these scammers. All Citizens and Residents of the USA are taxed on their world wide income: PERIOD.
Asset protection planning will not change this sad but true fact.
Fiction 4: USE A NEVADA CORPORATION: YOUR CREDITORS WILL NEVER FIND THE HIDDEN MONEY
FACT 4: Stay away from Nevada corporations. Many of the most heavily promoted scams use Nevada corporations. They argue that bearer shares allow you to control, but not own, money in a Nevada corporation. This is pure nonsense. Nevada corporations do not work and they are a huge red flag to the taxing authorities.
Fiction 5: JUST HIDE YOUR MONEY AND LIE
FACT 5: Lying will get your thrown in jail for contempt of court. You protection should never depend on deception. Even if all the details of your asset protection plan are discovered you should not be compromised.
Fiction 6: GIVE IT TO YOUR SPOUSE
FACT 6: If an expert suggests that you give your assets away (usually to a spouse or child) you are in the hands of a real novice. This normally doesn't work and it is always a bad idea unless you were going to make the gift anyway.
Fiction 7: ONCE MONEY IS OFFSHORE IT IS ONLY TAXED WHEN YOU TAKE THE MONEY BACK INTO THE USA
FACT 7: If a practitioner suggests that the IRS can't find or tax an offshore account they are recommending that you commit tax fraud. RUN from then as fast as your legs can take you. In this post 911 world the IRS knows everything about every foreign account. Remember, US people are taxed on their world wide income.
Fiction 8: ALASKAN TRUSTS AND DELAWARE TRUSTS DO THE JOB
FACT 8: Alaskan trusts and Delaware trusts are untested. Remember, the full faith and credit clause in our constitution. Sister state judgments are enforceable in all other states including Alaska and Delaware.
Fiction 9: PURE TRUSTS AND CONSTITUTIONAL TRUSTS WILL PROTECT YOUR ASSETS (AND ALSO ELIMINATE YOUR DUTY TO PAY TAXES)
FACT 9: These trusts are fraudulent and have been declared illegal by every single circuit court. The IRS and the INCOME TAX are legal… the Supreme Court says this is so. These trusts don't work for either asset protection or tax reduction.
Fiction 10: OFFSHORE BANK ACCOUNTS PROTECT YOUR MONEY WHILE ALLOWING YOU FULL ACCESS TO IT
FACT 10: Offshore accounts are great and safe if done properly; however, they will not save you any taxes; and, unless connected with an asset protection trust will not protect your money. Remember, a US Judge, has jurisdiction over your BODY. It this Judge orders you to write a check to some creditor and you refuse, then you are going to jail for contempt of court. Simple as that: pay up or give up your freedom.
NEXT TIME SOMEONE WANTS TO BUY STOCK, ASK THEM TO TELL YOU WHAT THESE INDIVIDUAL ANALYSES MEAN: P/E, P/B, EPS, EVA, WACC, CAPM, ROE, RAROC, ROIC, NPV, DCF.
And the answer is: P/E: Price-to-Earnings; P/B: Price-to-Book; EPS: Earnings Per Share; EVA: Economic Value Added; WACC: Weighted Average Cost of Capital; CAPM: Capital Asset Pricing Model; ROE: Return on Equity; RAROC: Risk-Adjusted Return on Capital; ROIC: Return on Invested Capital; NPV: Net Present Value; DCF: Discounted Cash Flow
So, does that make the suggestions O.K.? Nope- ask them what diversification, beta and correlation mean. Maybe they can answer some of the first but they simply won’t be able to answer the latter.
INSURANCE PROCEEDS: Although an insured's creditors are theoretically entitled to the value of the life insurance policy, it is not so easy for the creditors to collect. (Michael Malloy)
The primary difficulty creditors face when trying to collect on a debtor's insurance policy is that insurance companies are under no obligation to pay the money in a policy to anyone until the insured exercises his or her privilege of surrendering the policy. Consequently, if the insured does not agree to offer his or her policy to reimburse creditors, the creditors are left with few options for collecting from the policy.
One way creditors can attempt to get around a debtor/insured's resistance is to take the insurance company to court seeking garnishment or distraint proceedings. This effort is looked down upon by the courts, and cases that have come before them have been unsuccessful.
Taking the insured to court offers a somewhat more viable option. At times judgments have been brought against policy owners. Efforts have been made to execute judgments by seizing debtors' property, including insurance policies. If the policies are unmatured, the creditor might seek to obtain their cash value, and if the debtor/insured has died, the creditor might pursue the policy proceeds.
A further complication for the creditors to surpass is when a debtor files for bankruptcy. Because of the federal Bankruptcy Reform Act of 1978, life insurance policies are protected from creditors' claims. Only in those states that have opted out of this federal protection can creditors attempt to regain their money via debtor's insurance policies.
YO FATSO!: 15.3 percent of children ages 5 to 11 and 15.5 percent of adolescents ages 12 to 19 are obese. The levels are three times what they were in 1980.
WORKING FOR OUR COUNTRY AND GETTING SCREWED AT THE SAME TIME. Several financial services companies or their agents are using questionable tactics on military bases to sell insurance and investments that may not fit the needs of people in uniform.
Insurance agents have made misleading pitches to "captive" audiences. They have posed as counselors on veterans benefits and independent financial advisers. And they have solicited soldiers in their barracks or while they were on duty, violations of Defense Department regulations.
The Pentagon has been aware of practices like these since the Vietnam War; investigations have even cited specific companies and agents. But because of industry lobbying, Congressional pressure, weak enforcement and the Pentagon's ineffective oversight, almost no action has been taken to sanction those responsible or to better protect those who are vulnerable
A young marine at Camp Pendleton, Calif. was sold a 20-year insurance policy last fall that gave him a death benefit of just under $28,000, plus some cash value far in the future, in exchange for $6,600 in premiums paid in the first seven years. That was more than 14 times what the same death benefit would have cost him under his military-sponsored plan.
Another product heavily promoted to military people is a type of mutual fund in which 50 percent of the first-year contributions are consumed as fees, a deal considered so expensive that such funds all but disappeared from the civilian market almost 20 years ago. (I taught this "investment" years ago as part of the series 6. I said then that it was a screw job on the young military since they would park ex military just outside the base and get them to sign up with this crap.)
An industry spokesperson had this to say- "Anything that is unethical or inappropriate should not exist, period. But "someone who is mature enough to fight and quite possibly die for their country should be freely able to decide how much and what kind of life insurance they should have."
What a pile of garbage. If it is insurance they need, fine, sell insurance. But the universal policies with cash value buildup are nothing more than commission driven products for those with the least ability to pay for them. Congress should be ashamed. But then Abramhoff worked unabated for years. So much for ethics.
EMPLOYER LONG TERM CARE: (PRU) Sixty-two percent of workers said they would consider long term care insurance as a voluntary benefit if their employers offered it.
Employees need better information and education to determine if LTC insurance is right for them - Today, 56 percent of consumers are not familiar with the benefits and features of long term care insurance. In fact, only 14 percent feel very familiar. As yet, too few (only 30 percent) have talked with any financial professional to better understand whether this product is right for them
CLASSIFICATION OF BENEFICIARY DESIGNATIONS (Michael Malloy, CLU)
Beneficiaries are classified as either a specific designation or a class designation. A specific designation customarily identifies the person by both name and relationship to the insured. If the designated beneficiary is the insured’s wife, her maiden name should also be included to prevent any confusion should there be a previous or future wife with the same first name. One should not designate the beneficiary simply as “husband or wife of the insured,” since it may cause confusion if the insured has married more than once, as to whether the designation refers to the person who was married to the insured at the time of the designation, or to the person who was married to insured at his/her time of death.
The relationship to the insured in the designation is considered descriptive rather than a statement of entitlement. If the beneficiary is identifiable by name or other means, he or she is still entitled to the policy proceeds even though the stated relationship to the insured is no longer applicable, or never was.
A class designation is used when the insured wants the proceeds divided equally among members of a specific group: children, grandchildren, brothers, sisters, or heirs are a few examples. This type of designation may be used along with a specific designation. For example, designating children by name in addition to, “and any other surviving children born of the marriage of the insured and John Doe, husband of the insured.”
Legally, class designations are valid and proper, but they present the problem of identifying members of the class. A class designation is not entirely free of possible complications, and even the simplest designation can cause confusion. For example, in the designation “children of the insured,” the insurance company must determine if there are any surviving illegitimate children, children from a previous marriage(s), or adopted children. Even the more precise designation, “children born of the marriage of the insured and Mary Smith Doe, wife of the insured,” does not indicate whether adopted children are given the same status as natural children.
When either the insured or the insured’s spouse has children by a previous marriage, the class designation must be carefully worded so that the insured’s intentions may be properly carried out. Because of the complications and perils of the “heirs” designation, many companies will no longer accept this designation.
Most companies restrict the use of class designations as they may lead to delays in settling death claims, and may cause considerable trouble and expense for the company. Insurance companies will not accept class designations whose members are difficult to determine, or whose relationship to the insured is remote. When a class designation is acceptable, it must be described as precisely as possible. All insurance companies permit the designation of children as a class, as it protects the interests of unborn children. Otherwise, many children would be deprived of insurance protection due to the failure of the insured to update his/her designation after the birth of an additional child or children.
STRESS: Constant stress at work or at home may be may be more dangerous for women than men, according to a new study that shows women are more sensitive to the effects of chronic stress.
"Serious disorders such as major depression, anxiety, and autoimmune dysfunctions, all linked to higher levels of circulating glucocorticoids (stress hormones), are more prevalent among women than men,"
SAD: The life expectancy in Swaziland is just 29.9 years.
Before you criticize someone, you should walk a mile in their shoes. That way, when you criticize them, you're a mile away and you have their shoes.
YOU THINK PRIVATE PENSIONS ARE IN TROUBLE- Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag.
Some experts are warning of tax increases, or of an eventual decline in the quality of public services. States, cities and agencies that do not move quickly enough may see their credit ratings fall. In the worst instances, a city might even be forced into bankruptcy if it could not deliver on its promises to retirees.
A benefits consulting firm that advises states and local governments says that the estimated national total liability could be $1 trillion
WAGE DROP (IRS, NY Times) The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II.
The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent. Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002
In the past, overall personal income rose from one year to the next with relentless monotony, the growth rate changing in response to fluctuations in economic activity but almost never falling.
But now, with many more ordinary employees joining high-level executives in having part of their compensation dependent on stock options and bonus plans, a volatile and relatively unpredictable new element has been introduced to the incomes of millions of workers.
Before the recent drop, the last time reported incomes fell for even one year was in 1953. The only other time since World War II that the I.R.S. reported an interruption in income gains was from 1947 to 1949, but that was because of changes in the tax law at the time that affected how income was reported rather than an actual fall.
From 2000 to 2002, individual income taxes fell 18.8 percent, more than three times the decline in adjusted gross incomes
More than 352,000 taxpayers, one of every eight who had worked their way above $200,000 of income in 2000, fell below that figure in 2002.
At the very top the ranks thinned by more than half. The number of taxpayers reporting adjusted gross income of $10 million or more fell to 5,280 from 11,215.
The combined income of this rich and thin slice of Americans plummeted 63 percent, to $110 billion, in 2002 from $300 billion in 2000. Among those who stayed in this category average annual income fell 22 percent, to $20.9 million from almost $26.8 million in 2000.
Capital gains income, which results from selling stock market shares and other assets at a profit, fell over the two years by more than 29 percent, to $246.8 billion from $349.5 billion. So many companies reduced or halted dividends after 2000 that by 2002 dividend income had fallen 17.4 percent, to $98.8 billion.
The stock market decline also affected the incomes of those between $1 and $5,000, which includes large numbers of children in affluent families with investments for college costs. Incomes for that group fell 7.8 percent over the two years, to $33.3 billion, as dividends fell and those who had to sell equities in the depressed market to pay tuition reaped smaller gains in 2002.
WHY FUNDS OF FUNDS? Private equity funds of funds (FOFs) have become big business. Today, FOFs form 14% of new money raised. I test six explanations for the rise of FOFs. First, I find that FOFs do not generally deliver superior returns. They do, however, do well enough for the limited partners (LPs) that hire them. Second, FOFs allow small LPs to scale upward, to invest in more funds. However, I find that they do not contribute to diversification. What they really do is to provide smaller LPs avenues to lower the cost of fund management. Third, FOFs allow large LPs to scale downward, to invest vast amounts over a short duration. However, the mechanism is imperfect because LPs can either use many FOFs and risk coordination problems among them or few FOFs and risk getting held up. Fourth, FOFs are used by LPs with weaker governance structures. Fifth, there is some evidence that LPs use FOFs to learn to invest in new areas, but the support is weak. Last, the use of FOFs is partly due to cyclical booms.
METLIFE SURVEY OF AMERICAN ATTITUDES TOWARD RETIREMENT: Baby Boomers are increasingly anxious about retirement. The number of Boomers "worried about retirement" has doubled, with younger members, age 41 to 49, more likely to voice concern - although two-thirds of those surveyed believe they are saving at the rate needed to maintain their lifestyle (however, that's down from 77% in 2001). One thing that hasn’t changed: Almost half (48%) of Boomers plan to work beyond the traditional retirement age, almost equal to the 2001 figure. On the other hand, of those who plan to continue working, 69% will do so to stay active and engaged, up from 42% in 2001.
PENSIONS: (Watson Wyatt) The percentage of employers with fully funded pension plans declined from 84 percent in 1998 to 37 percent in 2002. In 1992, 57 percent of companies were funding their plans at the ERISA minimum, compared to 30 percent in 2002.
PLANNERS? ADVISERS? OR JUST PLAIN SALESPEOPLE?: (WSJ) A Securities and Exchange Commission rule adopted this year requires, among other things, that brokers register with the agency as investment advisers if they hold themselves out to the pubic as financial planners or as providing financial-planning services. The registration requirement, which kicks in Jan. 31, will mean that broker/advisers will be subject to the same fiduciary and disclosure standards as investment advisers have been since the Investment Advisers Act of 1940.
Under the SEC rule, only brokers who provide advice as part of their regular business of brokerage are exempted from the Advisers Act. The SEC says financial-planning services -- whether those particular terms are used or not -- won't be seen as "solely incidental" to a broker's business. Brokerage firms, having initially welcomed the exemption, have since raised questions about how the guidance would work in the context of developing client relationships.
For instance, some executives question how a broker is supposed to turn away an existing client seeking advice on things like saving or insurance just because the broker doesn't want to trigger the Advisers Act. Those questions mainly relate to how "financial planning" services are defined. According to the Advisers Act, financial planning typically involves advising clients on how to reach a wider array of life goals -- like retirement -- beyond investing.
Brokerage firms for more than a decade have gone beyond their traditional role as middlemen in the buying and selling of stocks and bonds and restyled themselves as problem solvers that can take into account clients' overall financial picture. They increasingly charge their customers an asset-based or fixed fee, which provides a steadier source of revenue than commissions tied to investment transactions. Regulators also have encouraged such a fee-based pricing model because it better aligns the interests of brokers and customers than the commission model.
The brokerage industry's shift in focus, however, has stirred up SEC-registered investment advisers -- mostly independent financial advisers -- who want broker-advisers to be held to the same standards as they are when dispensing advice.
Those independent advisers, mindful of the competitive threats from brokerage firms, have argued that they have a higher fiduciary duty to represent the best interests of clients than brokers who aren't regulated under the act. "The problem again is in part fiduciary liability," says Duane Thompson, a managing director at the Financial Planning Association, a trade group. "Brokers would have higher exposure to liability acting as fiduciaries."
Me- well, this is a pile of garbage. Note the comment, "The SEC says financial-planning services -- whether those particular terms are used or not -- won't be seen as "solely incidental" to a broker's business" That also means that in those states requiring licensing as an Insurance Analyst, the term ‘planner’ would then require the proper licensing. That won't happen in California. The B/D firms have all known about the laws for years and have simply violated the law and hoped nothing would be done (they were right). They hope for the same thing now- so does the FPA, CFP Board of Standards, NAPFA, CPA Society, etc. Well, there goes their fiduciary status. The avoidance of the law is illegal. You cannot be a fiduciary and be a liar and fraud.
INCOME AND INVESTING: Workers making <$35,000 of annual household income and less than one-quarter (22%) of workers are in 401k) or 403(b)s plans
Make between $35K and 50K and 40% of workers participate
Make between $50K and $75K and 54% of workers participate
Make > $75K and 66% of workers participate.
401(k): nearly 30 percent of workers eligible to invest in 401(k)'s don't do so. If you do participate, it's important to contribute as much as the Internal Revenue Service and your employer's plan permit if you want the maximum tax advantage. For workers 50 and older, this includes using the government's catch-up provision, which permits them to stuff an additional $4,000 into their accounts above the current annual 401(k) limit of $14,000. (In 2006, the annual limit goes to $15,000 and the catch-up limit for older workers goes to $5,000.)
WATER: Flood insurance is a good idea because 25% of claims are filed in areas of moderate risk.
DYING (HealthGrades, Inc) "a typical patient may be 65% less likely to die at a hospital with high quality ratings than at a hospital with low quality ratings."
CAN YOU IMAGINE HOW BAD THIS WILL GET?: 36 of 47 states that participated in a government water survey expected shortages within 10 years.
NEVER BUY STUFF FROM A BANK: (USA Today) A broker persuaded hundreds of small-town bank customers, including retired clergy and educators, to invest their savings through the brokerage subsidiary of his employer, AmSouth Bancorporation. In 18 months on the job, he amassed more than $1 million in commissions from about $15 million that bank customers placed with him. He put most of the money into bank variable annuities, a controversial product that combines life insurance with mutual funds. He got a top award and a trip to Mexico. That was before 2000.
Mississippi authorities said he was guilty of pushing many elderly and unsophisticated clients into unsuitable investments, violating his legal obligation as a licensed broker to put their interests before his.
Despite widespread concern about the investment's cost and suitability, particularly for elderly customers, more than 16 million Americans own $1 trillion of the product. Each year, banks, brokerages and insurers sell about $100 billion more.
The variable annuities sold were costly and underperforming compared with many popular investments. They locked up customers' savings longer than many might have been expected to live. And in the midst of a collapsing stock market, the investments produced losses that ranged from hundreds to tens of thousands of dollars.
By trying to pin blame solely on the broker, however, AmSouth overlooks a history of regulatory reprimands alleging lax supervisory and compliance procedures. Moreover, it stonewalled customers and regulators about its compliance failings
Indeed, AmSouth heavily promotes high-commission investment products, often irrespective of customers' desire or suitability, according to the court documents, regulatory records and interviews.
Why was the broker so successful? He gained their "trust". The article continues, ‘Newly licensed but without formal sales training by First American and with no sales brochures or prospectuses, he relied on his bluff personality and the trust of bank customers and his parents' friends who came to see him.’ Many clients were "coffee club" habitués who gathered at the bank, amid sunny views of Main Street, to talk about the day's obituaries, timber prices for southern yellow pine and the legendary Mississippi State baseball team.
He was "Handsome and popular."
Many of the victims noted, ""I suppose I didn't read the fine print closely enough," "They have never admitted to us that anything was wrong." "This is happening to us, and there are lots of people when they get to our age — I don't care how much education you've got — it seems they take advantage of you. You have to figure out every angle. Whether you have $1,000 or $1 million, if you don't ask questions and don't know what's going on, you don't have a chance."
My continued comments: None of these people had to lose anything- at least to the level they had. But they don't read. They won't read. They "do" things based on trust, feeling good and a lot of esoteric issues like "handsome and popular". They "do" things because their neighbor did, their co workers did, their other family members did and so on. Invariably, people invest because they "like" the person because of being a golf buddy, member of the PTA, nice legs and all the other stuff.
Unfortunately, the SEC and NASD are so far behind the curve that they have only recently issued guidelines for use. But I have written about the unethical activity and use of variable products for years and have included this short statement in my book, "variable annuities are generally deceptive offerings of a product that will never work as projected simply because the very entities that you think protect you have allowed pure deception in the marketing material."
But such warnings are only viable for people who read. As such, such warnings meet a very few consumers. They will continue to be victimized and until someone like Oprah stands up and says something, it will go on relatively unabated.
HOW LONG WILL YOU LIVE?
Many people will exceed the average life expectancy for their age group. Here are your odds:
Male, 65 Living to 85 Living to 92
50% 25%
Female, 65 Living to 88 Living to 94
50% 25%
Couple, both 65 One will live to 92 One will live to 97
50% 25%
Source: American Society of Actuaries
401(k): The average 401(k) balance was just $45,634 at the end of 2004, according to a study by the Vanguard Group
HEALTH CARE: the Employment Policy Foundation says employer contributions to health plans, which constituted 7.3% of total compensation last year, would reach 16.5% by 2010 at the current pace. The per-employee annual cost would more than triple, from $3,262 last year to almost $11,000 by 2010.
One coping strategy, employee cost sharing, has become common for both individual and family plans across all industries. On average, employees pay 22.6% of the costs of family coverage and one-third of the costs of individual coverage.
ILLITERATE: Eleven million U.S. adults — about one in 20 — have such poor English skills that they can't read a newspaper, understand the directions on a bottle of pills or, in many cases, carry on a basic conversation. Recent immigrants with limited or no English skills account for most of the group, adult education advocates say, but the survey suggests that even the average adult has low skills. Only 13%, for instance, are able to compare viewpoints in two editorials; interpret a table on blood pressure, age and physical activity, or compare the per-ounce costs of two cans of soup.
Only 52% could look at a heating bill and figure out that a five-cent-per gallon deduction on a purchase of 140 gallons of oil would yield $7.
The National Assessment of Adult Literacy found that an estimated 30 million adults, or 14%, have "below basic" skills. While blacks' abilities improved across the board, there were few improvements overall.
Interviewers surveyed 19,000 adults ages 16 and up living in the USA in 2003 and found that the basic skills of whites, Asians and Pacific Islanders rose modestly if at all across all education levels. Hispanics were the only group that fared worse than in 1992, in two of three areas: the ability to read "continuous texts" such as books and magazines, as well as forms, tables and TV listings. They were unchanged in "quantitative literacy," the ability to add a bank deposit slip
The survey concluded that an estimated 11 million adults are "non-literate" in English, including 4 million who probably can't speak English and 7 million who can't answer basic written questions.
PROPOSED LTC LEGISLATION: The legislation will extend Medicaid's "lookback" period for all asset transfers before qualifying for Medicaid coverage of nursing home care from three to five years and .... The bill also would make any individual with home equity above $750,000 ineligible for Medicaid nursing home care.
The legislation provisions impacting senior citizens will also:
Establish new rules for the treatment of annuities, including a requirement that the state be named as the remainder beneficiary.
Require Medicaid applicants to provide "full information . . . concerning any transaction involving the transfer or disposal of assets during the previous period of 60 months, if the transaction exceeded $100,000, without regard to whether the transfer or disposal was for fair market value."
Allow Continuing Care Retirement Communities (CCRCs) to require residents to spend down their declared resources before applying for medical assistance.
Set forth rules under which an individual's CCRC entrance fee is considered an available resource.
Require all states to apply the so-called "income-first" rule to community spouses who appeal for an increased resource allowance based on their need for more funds invested to meet their minimum income requirements.
Extend long-term care partnership programs to any state.
Freeze home health care payments under Medicare at current levels for a year
FAT SMOKE: The America's Health Rankings report claims that 23.1% of the U.S. population is obese...twice the level in 1990. Further, while the number of smokers has fallen about 30% since 1990 (to 20.8% of the population), most of that decline came in the early 1990s with no significant drop between 1993 and 2003. Bottom line: With more people getting fat and fewer giving up smoking, the improvement in the overall health of Americans has stalled. This article claims that life expectancy in the U.S. is less than 70 years...less that 28 other countries.
HOW THE ‘BEST” SOFTWARE PROGRAMS ALLOCATED
Financial Engines Quicken.com mPower
Cash 5 0 0
Large-cap stocks 38 45 56
Small-cap stocks 10 17 17
International 16 21 20
Bonds 31 17 7
Think about it. The best software that have next to no correlation each to another. That's not retirement planning- that's guessing.
NO NONSENSE FINANCE
McGRAW HILL
From a reader: “Thank you for writing the informative and refreshingly honest No-Nonsense Finance.
Unfortunately, I found myself described amongst the pages as the uneducated investor who takes advice from a friend, hires a planner and a broker and loses 60% of her money. Ouch. Luckily, yours is the first publication that actually explains what went wrong and how to take more grounded steps going forward. Your book (and website) have helped me begin to understand many important principles for prudent investing. Thank you again for your dedication to making Finance and Investing accessible for the rest of us.”
RETIREMENT: Workers with 40 or more quarters of covered employment qualify for Social Security retirement benefits, which are based on earnings received during the 35 years in which the worker had the highest earnings, up to certain limits. Those who retire at the full retirement age, which had been 65 but is now increasing gradually to 67, receive full benefits. Workers can begin collecting reduced retirement benefits at age 62. Current rules reduce benefits below the full amount by 6.67 percent per year for the first three years that retirees collect payments before the full retirement age, and then by 5 percent per year for each additional year of receipt before the full age. The system also rewards those who delay retirement with higher benefits. For those turning 62 in 2005, benefits increase by 8 percent for each year that beneficiaries delay claiming beyond the full retirement age, up to age 70.
LIFETIME: According to the Centers for Disease Control, average life expectancy for men in 2000 was 74 years, versus 70 years in 1980. The average life expectancy for women in 2000 was 79 years, versus 77 years in 1980.
AMERICAN ACADEMY OF ACTUARIES- Either a 1.92 percent payroll tax increase or a 13 percent benefit cut would keep Social Security in actuarial balance for 75 years.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
Life and Disability Insurance Analyst
2232 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
Marina Office 510 357-1554
Cell 510 459-7797
LTC: A majority (62%) of those surveyed have at least one serious misconception about who provides long-term care coverage or the conditions under which coverage is offered. For example, more than four in ten are unaware that Medicare provides limited coverage for skilled nursing care, limited to 100 days in each benefit period, and only following a hospital stay.
46% of those who currently have health insurance believe that this insurance would cover most of the costs of long-term care. In reality long-term care is rarely covered by health insurance plans. 30% were unaware that, while Medicaid does provide long-term care coverage, it is only available to those who have depleted nearly all of their own financial resources.
SUCCESSION (Wharton) Less than 15% of family firms survive under family control after the third generation. the more the members of the next generation have achieved fulfillment in terms of career, psycho-social issues and life stage, the more likely they are to have a positive succession experience.
when next-generation members have greater influence over the business -- both in terms of control over other individuals and their own situation -- the smoother the succession is likely to be. Mutual respect and understanding with the founder or owner are other critical issues.