Ruling Near on Fiduciary Duty for Brokers

investment adviceMy Comments: I’m proud of the fact that I’m held to a fiduciary standard. It’s in my best interest as a professional to be held to the same standards as attorneys, CPAs, physicians, and the like. My focus has to be on what is best for my clients, and that’s a good thing.

Readers of this blog have read my thoughts on this before. I’ve argued time and again that ANYONE holding themselves out as a “financial advisor” must conform to a fiduciary standard. At its most basic, this simply means acting in the best interest of the client. Period.

Now that it looks like this is likely to be resolved by the SEC in the near future, big financial companies across the spectrum are once again trying to keep themselves and their salesmen from being held to this standard. Their argument now is that it will hurt middle income investors.

My reaction is that middle income investors are already hurt by the often misleading, and deceptive practices of said same financial companies. These companies don’t want to be held accountable if one of their people makes a “mistake” and you, Mr. and Mrs. Middle Income Investor, gets hurt in the process.

By Daisy Maxey | Updated April 13, 2014

The debate over a new level of protection for investors in their dealings with brokers may finally be nearing a resolution. And some investor advocates worry about the direction it seems to be taking.

The debate centers on whether brokers should be required to act in the best interest of their clients when giving personalized investment advice, including recommendations about securities, to retail investors.

The “best interest” standard is known as a fiduciary duty. Financial advisers registered with the Securities and Exchange Commission already are held to this standard. But brokers for the most part are held to a different standard, of “suitability,” which requires them to reasonably believe that any investment recommendation they give is suitable for an investor’s objectives, means and age.

The Dodd-Frank Act, signed into law in 2010, directed the SEC to study the matter, and permits the regulator to establish a fiduciary standard for brokers. In late February, SEC Chairman Mary Jo White said the commission would make a decision by year-end.

Meanwhile, the Labor Department is working on a separate proposal that could establish a fiduciary standard for brokers who give advice on retirement investing. It hopes to offer a proposal by August.
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10 Numbers Everyone Should Know About Social Security

SSA-image-2My Comments: Understanding the Social Security system and helping clients make the best choices has become a passion for me.

Before a few months ago, I never realized there were a total of 97 months to choose from when signing up for benefits. I never knew the difference between the best month and the worst month could mean a couple of hundred thousand dollars to me and my family.

I never knew that if my spouse and I were more than a few years apart in age, there were options that might allow us to realize even greater benefits. I didn’t know I could apply for benefits and then suspend them to gain an advantage.

If you are going to reach age 62 in the next few years, or have reached it and have not yet applied for benefits, you need to get in touch with me to get a free report on how to maximize your benefits. Go to the Contact Info tab above and reach out to me.

By Emily Brandon April 10, 2014

If you want to maximize your Social Security payments, you need to familiarize yourself with the rules. The taxes you pay and the age you sign up for benefits play a big role in how much you will receive in retirement. Pay attention to these important components of Social Security.

6.2 percent
Workers pay 6.2 percent of their earnings into the Social Security system, and employers pay a matching 6.2 percent. Self-employed workers contribute 12.4 percent of their pay to the Social Security Trust Fund.

This is the income cap for Social Security taxes in 2014. Workers do not pay Social Security taxes on earnings that exceed $117,000 and will notice a bump in their paycheck once they earn above this amount in a single year.


Retired workers receive an average Social Security payment of $1,294 in 2014. Retired couples receive an average of $2,111.

If you sign up for Social Security benefits before age 66 and continue to work, you can earn $15,480 in 2014 before $1 in benefits will be temporarily withheld for every $2 you earn above the limit. The year you turn 66, the earnings limit increases to $41,400 and the amount withheld drops to $1 for every $3 earned above the limit. After you turn 66, there is no penalty for working and collecting benefits at the same time.

This is the earliest age workers can sign up for Social Security payments. However, monthly payments are significantly reduced if you sign up at this age. And if you work and collect benefits at the same time, your Social Security payments could be temporarily withheld if you earn too much.

Age 66 is when baby boomers born between 1943 and 1954 are first eligible to collect unreduced Social Security benefits. The Social Security full retirement age is 66 and two months for people born in 1955, and it increases in two-month increments to 66 and 10 months for people born in 1959. The earnings limit for working and collecting benefits at the same time also disappears once you reach your full retirement age.

The full retirement age is 67 for everyone born in 1960 or later. Most members of generation X and millennials will not be able to claim unreduced Social Security benefits until a year later than the baby boomers and two years after their grandparents, whose full retirement age was 65.

Social Security payouts further increase for each year you delay starting your payments up until age 70. After age 70, there is no additional benefit for waiting to sign up for Social Security.

If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefits totals more than $34,000 ($44,000 for couples), you will have to pay income tax on up to 85 percent of your Social Security payments. If these income sources are between $25,000 and $34,000 ($32,000 and $44,000 for couples), income tax will be due on up to half of your Social Security benefit.

This is the maximum possible Social Security benefit for a worker who signs up at full retirement age in 2014. However, to get this amount, you would need to earn the maximum taxable amount, which is $117,000 in 2014, in each of the 35 years factored into your Social Security payments.

The Real Health Care Spending Problem

healthcare reformMy Comments: When do you think Congress will adopt any intelligent process to fix ObamaCare so we can all get on with our lives? Anytime soon? Doubtful.

As someone who has sold health insurance policies of one kind or another since 1976, I think of myself as fairly knowledgeable about the issue. In those many years, as a private citizen, I’ve paid for a lot of insurance and had my share of health issues that required medical care. I’ve taken my share of drugs too.

All this led to an awareness of how premiums increased over the years, and to understand the trend was totally unsustainable (6 – 9% per year). Premiums increasing annually much faster than the size of our economy. Hospital costs and pharmaceuticals also leading the way. Then realize that folks in other parts of the world had generally better medical outcomes than we do.

Whenever I spoke about this, the typical response was that I should move to France, where they said I’d wait in line for months, and have to put up with a socialist government. Never mind that the French pay less per capita and have as good or better health care outcomes than we do. Having lived in, and visited France, it’s not a bad place to be. If I’m age 75, a citizen of France, and have a heart attack, my odds of living to age 85 are better than if the same thing happened to me here in the USA. So, tell me once again, what’s so wrong with their health care system.

And now we have ObamaCare. And it’s far from perfect, but no one has come up with anything better. Do you really think you’d be better off if we let the drug companies and the insurance industry write the rules for the rest of us? As it was, none of the several major stakeholders in this issue had the leverage to make it sustainable. The only way was to introduce a force from above, ie the US Government, change the rules, so that in time it will benefit all of us. At least, that’s the plan if we don’t let the drug and insurance companies screw it up.

By Kathryn Mayer | April 17, 2014

Stop me if you’ve heard this one: For better health care we need to get out of the country.

And when I say better health care, I mean cheaper health care. Or really, I mean both those things since we Americans often pay more than everyone else for the same thing.

Some disturbing information is highlighted in an annual report, out today, from the International Federation of Health Plans. It looks at health care price variations across the globe, while offering insight into one of the greatest, age-old debates. Why do we spend so much on health care? Here’s their answer. Ready? Our prices are too high. (Prices! who would have thought of that one?)

Some examples:
An average one-day hospital stay in the United States cost a whopping $4,293 last year, six times more than it did in Argentina and nearly 10 times the cost in Spain.

An MRI? That’s (on average) $1,145 in the United States. In Switzerland, it’s $138.
Delivering a baby? $6,623 in Australia; $10,002 in the States.

An abdominal CT scan is nearly $900 here. Want it for $800 less? Go to Canada.

Here’s where you might counter with, “Who cares? You want cheaper prices? Go to Canada, then!” Health care in the United States — and everything else — is far superior (the prevailing wisdom suggests), and they’ll pay more here rather than suffer through medical procedures in Europe.

But can we talk about prescriptions — from specialty drugs to those treating common ailments? Cause it’s a lot more expensive here, too. And you can’t argue that’s different from country to country.

A Nexium prescription, for example, one of the most popular prescriptions out there that treats acid reflux disease, is $215. In England, Nexium costs $42; in the Netherlands, $23.

Just a reminder: Nexium in the United States is the same as Nexium in the Netherlands. So why do we have to pay 10 times more for a small, purple pill just cause we’re American?

Well, for one, we’re not negotiators. While other countries negotiate with hospitals and drug manufacturers, we just take it. Though carriers, of course, do some of it, we’re not getting the kind of discount other countries do. And from the looks of the information in the report, we’re getting ripped off. It’s no wonder medical expenses are the No. 1 reason for bankruptcies in this country.

Don’t tell me it’s not in our nature: I’ve witnessed people haggle over a quarter at a garage sale, for God’s sake.

Overall, says Tom Sackville, chief executive of the International Federation of Health Plans, the “price variations bear no relation to health outcomes. They merely demonstrate the relative ability of providers to profiteer at the expense of patients, and in some cases reflect a damaging degree of market failure.”

The research also dismisses the popular notion that Americans spend more because we use more. In reality, the report finds that we go to the doctor less and have fewer hospitals per capita than most European countries.

Really, it’s a wonder we don’t have to go to the hospital or doctor more often. Cause having to overpay for things — and I mean really overpay — can really make a person sick.


10 Things You Should Know About Social Security

My Comments: It’s no secret that Social Security is a major issue these days. So many people are arriving at the magic number when you can apply. For financial advisors like myself, knowing most of the variables and being able to help clients and others make the best decision for themselves is important. When you start digging, the number of variables is mind boggling and making the wrong choices can be costly.

As before, Kiplinger has put together an interesting slide show for you to follow. The image just below is a screen shot of their page. I’ve set it up so that if you click on the image, you reach the slide show and navigate to all the pages with the blue arrow. All 12 pages. Have fun!
10 things about SSA

Forecasts of US Fiscal Armageddon Are Wrong

080519_USEconomy1My Comments: Over the years I’ve had people wonder why I’m an optimist. They’ve decided I’m simply blinded by whatever it is that causes me to lean to the left instead of the right. To their mind, the world, and in particular America, is going to hell in a handbasket.

I believe that for centuries, every generation, as they age, thinks the landscape of society is doomed, and that the younger generation is hopeless. But over my 70 plus years, I’ve enjoyed a very satisfying life. Yes, there  was WW2, the Vietnam War, rock and roll, every crisis de jour you can imagine. There have been bad days, but they’re far outnumbered by the good days. If I have a regret, it’s that I’ll not live to see the next 70 years.

I’m baffled by the attitude of the blathering pundits on TV, especially those on the right, who do everything possible to turn back the clock. They sound like 4th graders. And many of those who get to Congrass act like 4th graders. But nothing I say will change that since it’s been this way ever since.

I was and am hoping Jeb Bush decides to run for President in 2016. Not because I agree with what his party says, but because he is about the only leader on the right who has graduated from the 4th grade. And now has an advanced degree in life.

As an immigrant to this country, I believe one of America’s great strengths is the capacity to allow a spirited dialog that effectively moves all of us toward the future as it evolves. But I’ve yet to encounter a 4th grader with the ability to articulate what is best FOR ALL OF US.

This article suggests there is a strong positive in our future.

By Robert Barbera / April 7, 2014 / The Financial Times

Conventional wisdom has it that the American national debt is out of control, and that cutting the federal deficit is an urgent task if the US is to avoid a budgetary crisis. The logic is beguiling. But it is wrong – and the influence it exerts on policy makers may put a brake on future economic recovery.

Anxiety about US budget deficits has been a reality in the US for most of the postwar period. But today’s Cassandras argue that the aftermath of the financial crisis, superimposed on to the reality of an ageing America, has made the problem sharply worse. Eighteen months of recession, followed by decades of tentative recovery, mean that the burden of financing retiring baby boomers is set to overwhelm US finances in the years ahead.

The Congressional Budget Office believes that within 25 years the government’s accumulated debt will equal an entire year’s worth of economic output. Some analysts fret that interest payments will then be so onerous that cripplingly high taxes will be the only alternative to a ballooning debt and eventual default.

Such forecasts of a federal debt disaster depend on an assumption that is rarely mentioned: that interest rates will normalise even though economic growth will not. Combine decades of tepid expansion with traditional real interest rates, and an unsustainable debt burden quickly comes into view. But that combination would represent a dramatic break with history. It goes against everything we know about the mechanisms that determine real interest rates. It is, therefore, a slim reed on which to base a radical departure for economic policy.

In its February report the CBO serves up the consensus view in elaborate detail. Deficits swell over the decades ahead and the debt climbs to 100 per cent of gross domestic product. The subsequent discussion centres on how best to rein in these fiscal excesses.

This is strange. The fact is that federal deficits have fallen precipitously over the past few years. In 2011 the watchdog projected that government spending (excluding interest payments) would exceed receipts by 7 per cent of GDP in 2038. It now states that this “primary deficit” will instead be 1.6 per cent of GDP, hardly cause for panic.

Yet despite this relatively sanguine view of the deficit, the CBO continued to sound the alarm about an incipient US debt crisis. Why? Because it believes that rising interest rates will amplify the debt burden at the same time as a weak economy saps the country of the strength needed to service the growing debt.

According to the CBO, the American economy will on average create a meagre 164,000 jobs a month during 2014, slowing to monthly gains of only 66,000 four years later. Nonetheless, the CBO projects that by 2018 the US Federal Reserve will have tightened monetary policy, raising the funds rate to nearly 4 per cent from close to zero today. It thinks the government will be paying an interest rate of 5 per cent on 10-year borrowings.

It is easy to imagine a scenario in which interest rates rise – the CBO projections envisage real or inflation-adjusted interest rates not far from the average seen over the period from 1955 to 2005. But real growth during that period averaged 3.5 per cent; far higher than the feeble expansion the CBO expects in the coming years. Yet if the US is doomed to endure a period of tepid growth then interest rates, too, will surely be lower.

It is not only the base rate that can be expected to fall in the weak economy envisioned by the CBO. The “term premium” – that is, the extra reward that investors demand for holding long-term debt – will also decline as fears of future inflation subside. In the 1980s and 1990s, when investors worried about the possibility of sustained increases in the price level, long-term bonds were perceived as risky assets. No longer. Now, financial instability and recession are the risks that keep investors awake at night. Long-term bonds are a good hedge against these risks. In such a world the term premium should be lower. Of course, this could change: a more traditional pace for economic growth could return, together with more worries about inflation. In that case, however, tax receipts would be substantially higher and the deficit and debt outlook much improved.

What happens if we combine tepid growth with tame interest rate increases? The “crisis” all but disappears. If the government pays a real interest rate of 1.5 per cent, instead of 2.7 per cent as the CBO expects, then government debt in 2038 will amount to 78 per cent of GDP, a far cry from the CBO’s forecast of fiscal Armageddon.

Is this rosy scenario an unhistorical fantasy? Far from it. From 1955 to 2005 the government’s real borrowing cost was about 1 per cent below the economy’s real growth rate. It is the CBO forecast, with the US compelled to borrow at real rates dramatically higher than its growth rate, that breaks with US history.

The writer is director of the Johns Hopkins Center for Financial Economics

Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013

5 Tax Rules for Investors

IRS-formsMy Comments: What day is it? Yes, it’s HUMP day, especially for those whose career path involves helping others with their tax returns.

Maybe some of what you find here will help you before the next HUMP day, April 15, 2015.

by: Allan S. Roth, CPA, CFP

Compared with taxes, investing seems simple. As a CFP and CPA, a very large part of my practice is focused on maximizing tax efficiency, a strategy that often saves clients tens of thousands of dollars annually. With the higher 39.6% marginal tax bracket and the 3.8% passive income Medicare surtax in effect, tax efficiency is more important than ever.

I don’t define tax efficiency as minimizing taxes, but rather as maximizing the return after taxes. For example, clients might be able to avoid taxes by holding municipal bonds – but if they are in a low enough tax bracket, they might keep more income after taxes by owning taxable bonds.
That’s the better goal.

Tax alpha comes from several sources, including:
* Product selection
* Asset location
* Tax-loss harvesting
* Roth conversion
* Withdrawal strategies

There are some general rules to follow for each of these sources. The one big caveat, however, is that everyone’s situation is different – some clients may have huge tax-loss carryforwards, others may have nearly all of their portfolios in either taxable or tax-deferred assets. That means some circumstances require breaking these rules.


Product selection is one way to increase a portfolio’s tax efficiency. At the most basic level, picking investment products for the long run avoids turnover. Whenever a client sells an asset in a taxable account, it generates a gain or loss with taxable implications. So holding on to assets with gains defers those taxes – that’s like getting an interest-free loan from the government. Meanwhile, some investment products are more efficient than others. Mutual funds or ETFs that turn over their holdings generate taxable gains passed on to clients. According to Morningstar, the median turnover of active equity mutual funds is 49%. This creates both short-term and long-term taxable gains – and, by the way, tends to reduce returns even before these taxable consequences are factored in.

Index funds may also create turnover, particularly those with narrower focus. For example, a small-cap value index fund must sell when a company holding becomes larger or no longer meets the definition of value. Even an S&P 500 index fund must buy or sell whenever S&P makes a change.

The broadest stock index funds, such as the total U.S. or total international stock funds, have the lowest turnover and are the most tax-efficient. Even those funds, however, sometimes must sell to raise cash to buy large IPOs, such as Facebook or Twitter.


Once you help a client choose the appropriate asset allocation, location becomes critical. As a rule, tax-efficient vehicles belong in taxable accounts, while tax-inefficient vehicles belong in tax-deferred accounts, such as 401(k)s and IRAs. (Roth wrappers are much more complex – more on that in a bit.) The Asset Location Guidelines chart offers a general guideline for asset location.

There are several reasons to locate some stocks in taxable accounts. First, capital gains can be deferred indefinitely – by avoiding turnover – and possibly eliminated altogether, passing them on to clients’ heirs with a step-up in basis. And dividends are taxed at 15% for most; even for those in the 39.6% marginal tax bracket, they still carry a 20% rate – lower than ordinary income.

By contrast, holding stocks or stock funds in tax-deferred accounts has three distinct disadvantages:
* It converts long-term gains into ordinary income, which increases the tax burden.
* Because stocks tend to be faster-growing assets, they create more ordinary income later, when the required minimum distributions will be larger.
* It could cause heirs to miss out on the step-up in basis.

What does belong in tax-deferred accounts? Slower-growing assets that are taxed at the highest rates. (Think taxable bonds.) Since REIT distributions are ordinary income, they also belong in the tax-deferred accounts.

One addendum: Although I believe muni bonds are overused, they would be held in a taxable account. Clients should not own stocks in a tax-deferred account while they have munis in their taxable account, however. They would likely earn more by holding the stocks in their taxable account and taxable bonds in their IRAs, and dropping the munis altogether.

What about Roth accounts? Although this is a complex subject (and very dependent upon individual situations), a general rule of thumb is that stocks and stock funds should be held in Roth accounts only when there is no more room (from an asset location perspective) in the client’s taxable account. REITs are often properly located in Roth accounts.

There are many other variables that could change asset locations, of course, including whether a client plans to pass assets on to heirs or will sell them to raise money to live on.
asset allocation

In late 2008 and early 2009, losses were plentiful and recognizing those losses created valuable tax-loss carryforwards. While only $3,000 a year can be recognized, an unlimited amount can be carried forward to offset future gains. With U.S. stocks at an all-time high as of mid-January, harvesting those losses even now is critical as equities are sold for any reason, including rebalancing.

When doing tax-loss harvesting, be sure to watch out for wash sale rules, making sure that clients don’t buy back the same security within 30 days. To avoid having to exit stocks for a month when selling a broad stock index fund, consider buying a similar but not identical fund. For example, you could replace Vanguard Total Stock Index Fund ETF (VTI) with Schwab U.S. Broad Market ETF (SCHB). Because they follow different U.S. total stock indexes, this transaction should keep your client clear of wash sale rules.

It’s never fun to harvest losses, but the silver lining to share with clients is that bad times don’t last forever – and that there will come a time when those losses will save them a bundle.

Roth IRAs and 401(k)s can be critical elements of your clients’ portfolios. A common myth is that the Roth wrapper is better than the traditional account if the assets are held for a certain number of years. This is false. The only things that matter are the marginal tax brackets in the year of the conversion and the year of withdrawal. If the marginal tax bracket ends up higher upon withdrawal, the conversion will have been beneficial.

There’s another factor: Since no one can be certain what lawmakers will eventually do, having three pots of money – taxable, tax-deferred and in a tax-free Roth – is an important way to diversify against unpredictable politicians.

Rather than have clients contribute to a Roth wrapper, I typically have them contribute first to a traditional retirement account, and then do multiple partial Roth conversions from existing IRAs to take advantage of potential recharacterizations later on.

I consider traditional IRAs to be partnerships between the client and the government. As an example: A $100,000 IRA owned by a client in the 30% tax bracket would be 70% owned by that client; converting it to a Roth costs the client $30,000 to buy out the government’s share.

If that client does three $10,000 Roth conversions, he or she will owe $9,000 in taxes – $3,000 per conversion to buy out the government’s share. If they put each $10,000 conversion in different asset classes early in the year, they’ll have up to 15 months or (if the client files an extension) even up to 21 months to see how each performs. If, for example, the assets in one conversion tank and lose half of their value, the client can hit the undo button and recharacterize – thus having the government buy back its share at the full $3,000 original price.

Recharacterization also gives a client a chance to undo an unexpected impact from the dreaded alternative minimum tax. Tax accountants often underutilize the strategy of multiple Roth conversions – which can often be a vital part of tax planning.

When clients transition from accumulation to withdrawal modes, tax strategy continues to be critical. There is a general rule of thumb that a client should spend taxable assets first, tax-deferred assets second and Roth assets last.

It’s not a bad rule to start with, because spending down taxable assets lowers future income when clients will be withdrawing from tax-deferred accounts – which generally have a zero cost basis and generate ordinary income.

But the analysis becomes more complex if a client has an opportunity to pay taxes sooner at a lower marginal rate. If, for example, a client is retired but elects to delay Social Security until age 70 (a wise move for the healthy), a client may have more deductions than income. Thus, it would be advantageous to either take out enough money to stay within the 15% tax bracket ($72,250 for married couples filing jointly), or to do multiple Roth conversions to use up that low marginal tax rate.

From a broad perspective, advisors have a wide range of options to provide clients with tax alpha. Another example: Because most advisors don’t get to design portfolios from scratch, they wind up keeping some existing assets while building a more diversified portfolio. So clients who come to me with S&P 500 funds and want to own a broader index – but have large unrealized gains that would create a tax hit if sold – can create a total index by using a completion index fund such as an extended market index fund, which owns every U.S. stock not in the S&P 500. Just by avoiding the sale of the S&P 500 fund, the client gains a tax advantage.

In most cases, coordinating with the client’s CPA is critical. Since many CPAs do not have a strong understanding of investing, you may need to explain some of these strategies to them. Tax strategy is far from simple – yet if done right, planners can create large amounts of tax alpha for clients in any phase of life.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo., and is a CPA. He also writes for CBS and has taught investing at three universities.