Tag Archives: financial advisor

5 Annuity Questions With Rational Answers

Piggy Bank 1My Comments: Every year, many BILLIONs of dollars flow from the pockets of Americans into a financial contract called an “annuity”. Originally, the idea was to give an insurance company some of your money, and they would agree to send it back to you, with interest, over time.

Over the years, the sophistication of these contracts has grown exponentially and they come in more flavors than seems possible. The latest have features that appeal to many of us who are increasingly older, fully understand the temporary nature of life, and are unwilling to simply curl up in a ball and hope for the best.

They are not always cheap, ie the internal costs can be serious, but we both know that most good things in life are not cheap. But you have to either know how to evaluate what you are paying for or find someone you trust to help you. The fact that so much money is flowing into them suggests there is are rational reasons to use them. (I’ve edited this slightly since it was written for advisors and not the general public.)

Jan 21, 2015 | By Chris Bartolotta

It’s no secret that there are a lot of misconceptions out there about annuity products. You make it clear that you’ve got some preconceived (and often incorrect) assumptions when you ask the following questions.

1. Aren’t fixed annuities bad for clients?

Let’s get this one out of the way first. Even setting aside the fact that there are numerous different types of annuities, and hundreds of products of each type, there is no such thing as a category of financial products that is inherently “bad.”

That’s not to say that annuities are right for everyone; that would be equally absurd. As with most things in life, the answer lies somewhere in between. What is good or bad for a client depends heavily upon their individual circumstances. The ideal client for a fixed annuity is typically at or near retirement age, has $100k or more in liquid assets, and has a low risk tolerance. Even within that subset of the population, though, there are myriad options available. Should they look at a SPIA? A DIA? An indexed annuity? Should they buy an income rider or not?

Saying that all annuities are bad is like saying all cars are bad. If you have a one-mile commute to work and don’t travel much, you probably shouldn’t be driving an SUV. If you’re a contractor who regularly hauls heavy equipment on the job, a coupe isn’t going to work well for you. The same principle holds true for annuities, or any other financial tool.

2. What’s the interest rate on this SPIA?
Somewhere, an actuary is reading this section header and laughing. Asking about the interest rate on a SPIA points to a fundamental misunderstanding of what a SPIA is and what it’s supposed to do, which makes it all the more unnerving to the annuity-savvy advisor that this question gets asked all the time.

A SPIA, shorthand for Single Premium Immediate Annuity, is what most people think of when they hear the word “annuity.” If you need to explain it in one sentence, it’s an exchange of a lump sum of cash for a stream of payments over a certain period of time, typically the client’s lifetime.

Since an insurance carrier doesn’t know the exact day you’re going to die, it would be extremely difficult — not to mention downright irresponsible — for them to try to price it for maximum earnings over the agreed-upon time period. It’s true that a carrier will sometimes try to be consistently the best in a certain client sweet spot — females aged 64 to 69, for example — but if you’re using SPIAs to try to earn tons of money, you’re not using them correctly. They should be used to cover known, fixed expenses. Accumulation of interest is best left to a deferred annuity or to investments.

3. How can I get a hybrid annuity?
The answer to this one is very easy. You can’t.

The term “hybrid” often gets thrown around by websites purporting to be about consumer advocacy, which typically tout market upside without any downside risk. While this technically does describe certain aspects of a fixed-indexed annuity, these are not “hybrid” products in any sense of the word. They are a well-defined class of annuities that are distinguished by certain features, just like any other product.

The theory these sources will claim is that, because the product is tied to a market index but protects against loss, you have a combination of the best parts of a fixed and a variable product. The reality is that while it’s true that a market index is used to determine gains in a given year, at no point is your money actually being invested into the stocks (or commodities, in some cases) in that index. They also often paint a rosy picture where the client can catch all of the booms in the market without suffering any of the busts. In reality, because it is still a fixed product, it can do better than a traditional fixed rate, but single-digit interest is still going to be the norm. This actually leads nicely into the next question you should immediately eliminate from your annuity lexicon …

4. How much should I invest in a fixed annuity?

Another easy answer here. Nothing.

That isn’t to say your clients shouldn’t buy annuities. It’s likely that some of them absolutely should. The issue here lies with thinking of fixed annuities as an investment, when in fact they are an insurance product. After all, you need a life license to sell them, not a securities license.

When your clients think of their fixed annuity as an investment, this creates the probability that they will begin comparing it to an actual investment, in which case the interest earned will start to look poor in a hurry. It behooves you to remind them that they are purchasing this product for guarantees, not to get rich. To put it another way, explain to them that fixed annuities are the mirror image of life insurance. Their life policy insures against the financial consequences of an early death; their annuity insures against the financial consequences of a long life.

5. Aren’t annuities expensive?
No trick question this time. The answer to this one is: It depends.

Annuities are often decried as being a poor choice due to the high fees involved. A base fixed annuity contract with no riders included, however, will have no fees at all.

Now, it’s true that a fixed annuity can have fees. Most indexed annuities and a handful of traditional fixed contracts have the option to add an income rider, and the vast majority of those carry an annual fee. It’s usually slightly under one percent, though some are more expensive, and some less or even free. Other types of riders, such as an enhanced death benefit option, may also be available and carry their own fees. It’s up to the agent or advisor to ensure the consumer knows what they are so they can decide if they’re worth the cost.

The White House and Hidden Retirement Fees

InvestMy Comments: It’s fairly easy to paint Wall Street as a villain in almost any article that deals with the management of money for the vast majority of Americans. After all, they typically act in their own best interest, which may or may not coincide with what’s in my best interest. But that’s the American way, isn’t it?

Here I’m reminded that if I’m bound by a fiduciary standard, as is my attorney, my doctor, my CPA, and by some of us in financial services, I have a legal, moral, and ethical obligation to do only that which is in my client’s best interest. And working hard to find ways to not disclose the fees I’m charged seems to violate what is in my best interest as a consumer.

Don’t expect this effort to remedy the problem to come from politicians who are in bed with Wall Street firms.

By Matt Levine February 24, 2015

The way that a lot of retirement investing advice goes is that you go to your broker and ask him what you should invest in, and he says, “Oh Fund XYZ is great, put all your money in Fund XYZ,” and the reason he does that is not that he loves Fund XYZ in his heart of hearts, but rather that Fund XYZ writes him a big check for steering you its way. I’m sorry, but that is the way it works. I mean maybe he also loves it in his heart of hearts, but that is not observable; the check is. As is Fund XYZ’s subsequent underperformance versus its benchmark.

A lot of people think that that is a bad system, and how could you blame them really? When I put it like that it just sounds terrible. U.S. President Barack Obama’s administration, in particular, seems not to like this system, and today the White House released this fact sheet (“Middle Class Economics: Strengthening Retirement Security by Cracking Down on Backdoor Payments and Hidden Fees”), and this report from the Council of Economic Advisers (“The Effects of Conflicted Investment Advice on Retirement Savings”), explaining how bad some retirement advising is. (Some: The administration also has high praise for the “hardworking men and women” who work as fee-only investment advisers.) New Labor Department rules are coming that would, if not quite outlaw these practices, at least make them more awkward, and part of the point of today’s releases is to justify those rules.

More On Legal & Compliance from The Advisor’s Professional Library
• Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.

• Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.

We don’t have the rules yet, though there is already a rather enormous literature on what they will or should or won’t or shouldn’t say. But we do have the Council of Economic Advisers report, and it is pretty interesting! The main conclusion is that “conflicted investment advice” costs Americans about $17 billion a year.

The math here is:
— There’s about $1.7 trillion in individual retirement accounts invested in funds that pay brokers to recommend them.
— The people who invest in those funds could improve their performance by about 1 percentage point a year by switching to other funds that don’t pay brokers.

Pages 17-18 of the report walk through the second point in some (stylized) detail. The report assumes an employee who invests in a low-cost index fund through her employer’s 401(k) plan. The expected gross return on the index fund is 6.5 percent, but the employee pays trading and administrative costs of 0.5 percentage points, for a net return of 6 percent. But then she quits her job, and an unscrupulous adviser recommends that she roll over her retirement fund into a new individual retirement account — and that she invest the IRA in a fund with a similar expected return, but with 1.5 percentage points of costs. She gets a net return of 5 percent, and the adviser and the mutual fund split the extra fees among themselves.

This math looks a little familiar. The Vanguard Group will cheerfully compare expense ratios of its funds against other funds, because Vanguard largely markets itself as the popularizer of low-cost index funds. Here for instance is a little thing from Vanguard’s description of its Total Stock Market Index Fund:

Vanguard feesI highlighted the 1.08 percent average expense ratio of “similar funds,” which is 1.03 percentage points higher than Vanguard’s advertised expense ratio. The Investment Company Institute finds an average expense ratio of 0.89 percent for actively managed equity funds, versus 0.12 percent for equity index funds, or a 0.77 percentage point difference. Also the actively managed funds tend to underperform the passive funds even before taking out fees, though that is a sensitive topic.

So you might conclude that somewhere between three-quarters and all of the costs of “conflicted investment advice” are really just costs of actively managed mutual funds. In other words, all the stuff about “backdoor payments” and “hidden fees” and “fiduciary duties” is a non-load-bearing distraction. Most or all of the work in the CEA paper is done by the difference in costs between actively managed mutual funds and passive indexing. The conflicts of interest boil down to: It is in the financial industry’s interest to steer investors into high-fee active funds rather than low-fee passive funds.

I don’t really know what to make of that. It would be weird if the White House put out a fact sheet called “Strengthening Retirement Security by Cracking Down on Active Investing.” And obviously that’s not quite what it’s going for with this paper. But it’s close. The world view underlying this report seems to be that a lot of what the financial industry does is extract unproductive fees for itself from ignorant consumers, and that you can crack down on the fees — and save consumers money — without reducing the incentives for any socially productive activity. This, it goes without saying, is a hugely popular theory. I feel like it is generically wrong, but there may be many, many places where it is specifically correct.

In my more dictatorial moods I think people should get to choose one of two options for their retirement investing:
1. You can invest only in a list of pre-approved, low-cost, fee-capped, diversified, probably mostly passive portfolios run by reputable managers, and if you lose money everyone will nod sympathetically and tell you it’s not your fault.
2. You can sign the omnibus liability waiver and invest in whatever you want, just go nuts, but if you lose all your money it’s a felony to complain.

But that is not the system we have now. It’s almost the reverse: The people with the least money and expertise, who really want and ought to have simple low-cost generic retirement savings, are at high risk of being steered into weird expensive stuff. It seems reasonable enough to try to nudge them back toward simplicity.

1. The White House fact sheet has some general (and tendentious) description of the new rules. Here is Bloomberg News, the Wall Street Journal, InvestmentNews, a Vox explainer. Here is Sifma expressing unhappiness, and more from Sifma on the topic. Here is a memo from Debevoise & Plimpton for the Financial Services Roundtable, also opposing the rule. Here is an FAQ from the Labor Department, and here are all the comment letters on the fiduciary-duty rule that the Labor Department proposed in 2010 and then withdrew because it was too drastic.
Since I have you here, two generic things that I think about fiduciary standards are:
1. It is impossible to make all broker-dealers fiduciaries, and trying to do so is a category mistake: Dealers are principals, and if you are selling someone something that you own, you can’t be asked to put her interests above your own. You would prefer a high price, she would prefer a low price, and making you give it to her for free because you are her fiduciary makes no sense at all.
2. There is an argument of the form, “If we couldn’t scam people quietly, we couldn’t afford to provide them the services that they need.” This argument is distasteful, but that doesn’t make it wrong. There are probably places where it is right. Arguably being sold on an expensive bad retirement plan is better than not being sold on any retirement plan and forgetting to save for retirement.
That said, I weakly think that neither of these things apply to retirement-plan brokers. They’re not acting as principal, so there’s no category-mistake problem in making them fiduciaries. And if you’ve got a retirement plan anyway — the new rules seem to be mostly about recommending rollovers and changes in allocations in existing 401(k)s and IRAs — then being sold a bad plan is probably not going to improve your situation. In that vein, the CEA report describes one mystery-shopper study:
The study finds that advisers recommend a change to the current investment strategy in about 60 percent of cases when the client had a return-chasing portfolio and in about 85 percent of cases in which the client had a diversified low-fee portfolio. The authors conclude that advisers “seem to support strategies that result in more transactions and higher management fees,” even when clients appear to hold the optimal portfolio.
Yeah that doesn’t seem like an improvement. (Try the Debevoise memo for a persuasive case the other way; Question 8 in the Labor Department FAQ is a good rebuttal.)
2. The fact sheet characterizes this as “$17 billion of losses every year for working and middle class families,” which is just plainly not true. The $17 billion number is for all “load mutual funds and annuities in IRAs,” or individual retirement accounts, as you can tell from page 19 of the report. Presumably a lot of IRAs are held by people who are not “working and middle class.” Mitt Romney has a notably large IRA, though I guess it’s not invested in load mutual funds.
Incidentally the report notes that “more than 40 million American families have savings of more than $7 trillion in IRAs,” meaning that that $17 billion comes to about $425 per year, per family with an IRA.
3. The stylized version is different from the actual version, which cites academic studies finding a wide range of underperformance. The report hangs its hat mostly on one study finding 113 basis points of underperformance.
4. As I’ve disclosed before, a lot of my money is in Vanguard funds (mostly though not all index funds), and I am personally a fan of their work.
5. Vanguard’s footnote cites to Morningstar for that average.
6. Also an interesting one. Here is a good post from Josh Brown, which we’ve discussed previously. Some amount of active underperformance is driven by specific market circumstances: For instance, active managers tend to favor certain factors that underperformed in 2014. Some of it is arithmetic: Everyone can’t be above average, and if everyone in the equity markets is a professional (not true, but becoming more true), then most professionals can’t be above average either.
7. Is this one? Well, what is “this”? It seems obvious to me that some amount of active allocation of equity capital to businesses is socially desirable, so rules that strongly disincentivize active management would be bad. But you don’t need rules to disincentivize it: Active management is more expensive than passive management, so the market should more or less discourage people from paying for it. The question is how to subsidize it, if it’s socially desirable. (I mean, not really, but something like this; we’ve discussed this topic recently.)

It is less obvious to me that the things the White House is explicitly objecting to — conflicted payments for investment advice, basically — are socially desirable, though again there is an opposing argument. Also note that these conflicted arrangements might be one way to subsidize active management, although actively allocating capital on behalf of bamboozled principals doesn’t seem socially optimal either.

— To contact the author on this story: Matt Levine at mlevine51@bloomberg.net

Long-Term Care and Who Will Pay For It

Pieter_Bruegel_d._Ä._037My Comments: Selling long-term care insurance has been a tough sell for me. It’s less appealing than life insurance and statistically, it’s less likely to happen than death. It’s an emotionally charged issue that’s hard to deal with rationally.

The major player in the long-term care insurance policy world is Genworth Financial. They’re on the hook for billions of dollars of benefits and are running out of money. You can argue emotionally that they should have known better, but rationally, if the money’s not there to pay benefits, they don’t have the ability to print it.

This possible outcome puts more pressure on all of us to better understand the dynamics of this and to make the best possible decisions about our personal future financial freedom. Find someone skilled to help you make a decision that it’s your best interest.

March 3, 2015 • Bloomberg News

Here’s an uncomfortable question: who’s going to pay for mom or dad’s nursing home bill — or yours, for that matter?

The answer, for about 1.2 million Americans, is Tom McInerney. McInerney, 58, is the chief executive officer of Genworth Financial Inc., the beleaguered giant of long-term care insurance.

McInerney is in a tight spot, and it’s getting tighter. Long-term care policies written in past decades have turned into a black hole for the insurance industry. Executives misjudged everything from how much elder care would cost to how long people would live. Result: these policies are costing insurers billions.

Genworth is struggling to contain the damage and on Monday warned of a “material weakness” in some of its accounting. To cope with mounting costs on the policies, Genworth has been raising premiums again and again. Some policyholders are furious.

“I was mad as hell,” says Arthur Mueller, an 83-year-old former real estate executive who lives in Dallas. Over the past 15 years, his annual Genworth premium has roughly doubled to $6,879.

There’s no quick or easy fix for Richmond, Virginia-based Genworth, which has posted two straight quarterly losses. The stock fell by more than half in the past 12 months, including a 5.4 percent slide Monday after disclosing the accounting weakness.

Genworth and other insurers have had to contend with the confluence of three powerful forces. The first is the rising price of elder care. Nationwide, the median cost of a private room in a nursing home is now more than $87,000 a year, after annual increases of 4 percent over the past five years, according to Genworth.

Bond Yields

Adding to the problems, interest rates have plunged to record-low levels. Insurers need to invest funds for decades before paying out on long-term care claims, so low rates hit profits from those policies particularly hard.

The third challenge boils down to demographics: America is graying. Nearly a quarter of Americans were born between 1946 and 1964, the typical definition of the baby boom generation. That’s more than 75 million people. By 2050, when the youngest boomers will be in their 80s, long-term elder care will devour about 3 percent of the U.S. economy, up from 1.3 percent in 2010, the Congressional Budget Office projects.

Given that, you might think more people would be opting for long-term care insurance, which typically covers nursing home costs and home health aides. But just the opposite is happening. Sales are falling, and big insurers like MetLife Inc. and Prudential Financial Inc. have stopping writing new policies.

Market Failure

“What’s happened over the last five, six years is an example, frankly, of market failure,” said Howard Bedlin, vice president for public policy and advocacy at the National Council on Aging. “There was a slew of pretty significant premium increases.”

Still, Genworth executives like McInerney, who joined in 2013, have said they’ll get it right eventually.

“While the product and the market has had its challenges, somebody is going to figure this out,” said Chris Conklin, a senior vice president at Genworth. “We’re sure going to try hard to have us be the ones that do it.”

But time is short. And it’s unclear if anyone can figure out long-term care insurance, at least in its current form. A.M. Best says that long-term care policies are among the riskiest products that life and health insurers offer. Standard & Poor’s and Moody’s Investors Service both downgraded Genworth’s debt ratings to junk in recent months, citing the pressure from long- term care policies.

Family Assistance

Genworth says that even with higher premiums, its old products are a good deal for customers. Despite his higher costs, Mueller says he’s sticking with his policy, given his age, the amount he’s already spent in premiums, and what nursing-home care could end up costing. His main concern, he said, is whether Genworth will still be strong enough to pay for a nursing home if he ever needs one.

Fact is, long-term care insurance might make little sense for many people. More than half of all elder care tends to be provided informally by family members. Government programs cover much of the rest.

Such insurance works best for people who want more costly care than is covered by Medicaid, according to Jeff Brown, a professor at the University of Illinois.

Karen Marshall said she’s learned how costly care can be without the insurance. She took leave from a high-paying job as an attorney at Dewey & LeBoeuf when she was in her 30s to take care of her mother in her final months of battling cancer. Soon after her mother died, Marshall’s father’s health deteriorated, and she left the firm.

‘Daunting Problem’

Marshall, 40, was spending her weekends driving back and forth from Washington to the home where she grew up in southern Virginia. Working as a corporate lawyer wasn’t an option.

“I just kind of felt like I had my back against the wall,” she said. “I spent so much time worried about dropping the ball for someone, whether it be my dad or work.”

Her father is now in an assisted-living facility that costs more than $2,500 a month, and Marshall says he’ll eventually have to move to a nursing home that would cost twice as much. Marshall, who takes on legal work to pay the bills, and started a nonprofit to aid other caregivers like herself, has been helping cover the costs. She says her dad will eventually end up on Medicaid.

Policy makers have been trying to figure out how to cope with the nation’s elder-care bill but so far have come up with few answers. A plan for long-term care insurance tied to the Affordable Care Act was scrapped by the government.

Genworth says insurance is just part of the solution to paying for long-term care. The company is exploring new products that could have more limited benefits and cost less, and ideas like government partnerships.

“It’s a daunting problem for the whole country, really,” Genworth’s Conklin said. “We at Genworth have really committed to try to come up with better solutions for people.”

A Stand-in For The Fiduciary Standard?

moneyMy Comments: I apologize for continuing to push this issue. But as a fiduciary, I’m bound to give advice that results in what is best for the client, legally, morally and ethically. That Wall Street firms resist this is not in your best interest.

Meanwhile, I received an angry call this week from a group that for now will remain nameless. The caller proceeded to rip me new one as I had borrowed an article that, according to him, belonged exclusively to his organization and I’d used it without specific permission. I was to take it off the web site immediately or face the consequences.

I have neither the time nor inclination to fight a losing battle, so I took it down. Never mind it was posted last October, attributed to the author, a prominent attorney and as coming from the organization in question. I was assailed for using other peoples ideas in my posts, never mind that they arrived unsolicited in my email inbox in the first place. My objective with this blog is to share what I consider good ideas and give credit to whomever is deserving.

I’ve been doing it this way now for four years and this is the first time I’ve been called or contacted in a critical manner. I intend to keep sharing stuff with whomever reads this blog. If you choose not to read any of it, that’s OK. But I still think all of us in this business who interact personally with clients need to be held to a fiduciary standard.

Mar 03, 2015 | By Allen Greenberg

With sincerest apologies to Walt Whitman:

O Fiduciary! My Fiduciary! Our fearful trip is (nearly) done,
The rule has weather’d every attack, the prize we seek is within grasp,
A new standard is near, the lobbying I hear, the people all exulting.

I don’t know about you, but I’m certainly “exulting.” Not just because the regulatory sausage-making may soon be done but because, frankly, I’ve heard enough of the Department of Labor’s wait-for-it, it’s-coming-any-moment-now, soon-to-be-unveiled fiduciary standard to last a good, long while.

This intensified soon after since President Obama announced his endorsement of the DOL’s plans to unveil its newly crafted fiduciary rule last week. But it actually began last summer, as speculation started to build about just when the DOL would move forward.

Of course, most of America couldn’t tell you whether a fiduciary was a noun, verb or something that happens after you eat too much Italian food. According to a recent AB Global survey, even plan sponsors are “confused or misinformed” about the fact that they themselves are, in fact, fiduciaries (30 percent fail to realize this). The sad fact is that investors are confused, too.

A campaign to help investors identify true fiduciaries “committed to objectivity, transparency, and plain English communications.” As reported by Barron’s this week, a survey by Opinion Research Corp. in 2010 of 1,319 investors found that 60 percent wrongly assumed that stockbrokers were already held to a fiduciary standard.

Not surprisingly, 90 percent wanted their brokers held to the fiduciary standard after being told about the difference between the fiduciary standard and the “suitability” standard that brokers are supposed to meet.

The Institute for the Fiduciary Standard understands this very well, which is why it has come up with an 11-point plan for anyone hoping to behave like a fiduciary, instead of, you know, posing as one.

Here’s a link to the IFS’s best-practices proposal. As you’ll see, there are items about acting in good faith, keeping fees under control, avoiding conflicts of interest, steering clear of soft-dollar commissions and third-party payments and more.

If a lot of Wall Street and its allies come off as acquisitive in this debate, Knut Rostad, president of the IFS, is our story’s hero, an even-handed player interested in doing more to protect investors without crippling the brokers.

“We hope brokers look at them seriously,” he said recently in speaking about his group’s best practices. “They were crafted with an explicit objective of being open to having brokers meet the practices … without lowering the standards.”

The institute’s proposal will be open for public comment until Monday. The organization’s board is expected to give final approval over the summer.
By that point, the DOL could be in the midst of multiple hearings on its fiduciary standard. Months later, perhaps many months later, it might have something hammered out.

Somebody in Congress – perhaps someone as powerful at Sen. Orrin Hatch – could then throw the proverbial wrench into the works with legislation that would make the DOL’s efforts moot.

Oh, wait, Hatch’s Secure Annuities for Employee Retirement Act already includes a provision that would do just that.

So, what’s the bottom line? The chances of a broader DOL fiduciary rule any time soon seem slim. The IFS version lacks regulatory bite, but at least we’d be doing something and then can get on with the next voyage in our lives

GOP Lawmaker Hopes To Halt Fiduciary Push

financial freedomMy Comment: This push by the GOP is, in my opinion, more smoke and mirrors from those beholden to the lobbyists from Wall Street. The crux of this issue is that the people who run Wall Street firms do not want their rank and file representatives, the ones who work with people like you and me on a daily basis, to be held to a fiduciary standard.

For those of you who may not understand, a fiduciary standard means that what is said and done by representatives has to be in all respects, in the best interest of those who are clients of those representatives. The push back has been going on for years, and here is another example of how monied interests are more concerned about the welfare of the monied interests than of the general public.

That it “harms thousands of low and middle income Americans’ ability to save and invest for their future” is absolute and utter bullshit. I’m someone who has worked and made a living for the past 40 years, helping low and middle income Americans save and invest for their financial future, not some politician, bought and paid for by Wall Street firms.

Feb 26, 2015 | By Melanie Waddell

Firing back after President Barack Obama endorsed the Department of Labor’s efforts to revise fiduciary rules for retirement plan advice, Rep. Ann Wagner, R-Mo., has reintroduced legislation to require the DOL to wait to repropose its rule until the Securities and Exchange Commission issues its own fiduciary rulemaking.

Wagner’s bill, H.R. 2374, the Retail Investor Protection Act, passed the House last year. But the Senate had “no interest” in taking up the bill and President Obama’s senior advisors threatened that it would be vetoed.

Better Markets and the Consumer Federation of America sent a letter to the full Senate the same day Wagner took action this week, arguing that the DOL rulemaking should be allowed to move forward as the “actual contents” of the DOL rule have not been made public.

Discussion about the DOL rulemaking “has for the most part been based on speculation,” Barbara Roper, director of investor protection for the Consumer Federation, and Dennis Kelleher, president and CEO of Better Markets, said in a letter.

“Much of (the discussion/complaints about the DOL redraft) has been directly contradicted by statements from DOL officials about its expected regulatory approach,” Roper and Kelleher wrote.

In a statement, Wagner said that she is reintroducing her bill because Obama and Sen. Elizabeth Warren, D-Mass., “presented a solution in search of a problem by proposing another massive rulemaking from Washington that will harm thousands of low- and middle-income Americans’ ability to save and invest for their future.”

“This top-down, Washington-centered rulemaking against financial advisors and broker-dealers will harm the very middle-income families that Senator Warren and President Obama claim to protect,” Wagner said. “Americans should be given more freedom to seek sound financial advice without Senator Warren and President Obama’s interference.”

Wagner’s bill says that the SEC would be required to “go first” in issuing its rulemaking under Section 913 of the Dodd Frank Act before the DOL is able to propose a rule that expands the definition of a fiduciary under the Employee Retirement Income Security Act.
But Roper and Kelleher told the Senate that the DOL rule should be “allowed to go forward, so that the public and all stakeholders have an equal opportunity to see the actual content of the rule.” Indeed, they wrote, “as required by law, at the close of the public comment period, DOL will consider all of the comments and input and decide the best course of action consistent with the law.”

By sending the rule to the Office of Management and Budget, DOL is simply starting the process to release the actual proposed rule for public comment, the two wrote.

The OMB review could take several months. Wagner’s bill would also require the SEC to “look into potential issues with a rulemaking establishing a uniform fiduciary standard in regards to investor harm and access to financial products that were not adequately addressed” in the agency’s 2011 study.

The SEC would also be asked under Wagner’s bill to look into “other alternatives outside of a uniform fiduciary standard which could help with issues of investor confusion.”

Wagner’s bill “is an investor protection bill in name only,” according to a statement from the Financial Planning Coalition, which comprises the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.

The coalition added that it “helped prevent this legislation from becoming law when it was first introduced and continues to oppose it now and in the future,” arguing that it would leave American investors “vulnerable to potential abuses and would substantially impede or even prevent the SEC from proceeding with congressionally authorized fiduciary rulemaking.”

Wagner’s legislation, the coalition stated, “would require the (Securities and Exchange) Commission to consider less adequate and less effective alternatives,” and would also “slow or effectively prohibit the DOL from proceeding with its proposed fiduciary rulemaking for financial professionals who provide investment advice to retirement savers.”

SEC Chairwoman Mary Jo White said last week that she would speak about her position regarding a rule to put brokers under a fiduciary mandate “in the short term,” noting that it remains her priority “to get the Commission in a position to make that decision” on such a rule.

When Patience Disappears

Interest-rates-1790-2012My Comments: We’ve talked extensively about the likelihood of a market correction, if not a crash, coming in the near future, maybe this year. What many have not talked about are the implications of a rise in interest rates.

This is going to happen, given that they’ve been on a downward trend for twenty plus years and can’t go much lower, if at all. If you want folks like me who manage your money to anticipate these things to avoid chaos and help you make money, you should at least be aware of some of the variables. Here’s an articulate overview.

Commentary by Scott Minerd / February 13, 2015

Advance notice of the timing of a rate hike by the Federal Reserve may hinge on the removal of just one word, warns St. Louis Fed President Bullard.

Market observers keen to anticipate the Federal Reserve’s next move are wise to follow the trail of verbal breadcrumbs laid down by St. Louis Fed President James Bullard, a policymaker I hold in high regard. When Fed policy seems uncertain or even inert, Dr. Bullard’s public statements have historically been a Rosetta stone for deciphering the Fed’s next move.

For example, in July 2010, Bullard wrote in a report ominously titled “Seven Faces of the Peril” that it was evident the Fed’s first round of quantitative easing had not been sufficient to stimulate the economy. In the report, which was widely picked up by the financial press, Bullard warned about the specter of deflation in the U.S. economy, and that the U.S. was “closer to a Japanese-style outcome today than at any time in recent history.”

That summer, months ahead of any Fed decision to proceed with QE2, it was Bullard who began a drumbeat of steady public messages about the necessity of a second round of easing. By August, the Fed was not talking about whether it should implement a new round of QE, but how. In November 2010, the Fed announced its plan to buy $600 billion of Treasury securities by the end of the second quarter of 2011. If you followed Bullard, you were expecting it.

While Bullard is not a voting member of the Federal Open Market Committee this time around, I still view him as an important policy mouthpiece. That is why it was so interesting when he underscored Fed Chair Janet Yellen’s comments at a press conference following the committee’s Dec. 16-17 meeting in an interview with Bloomberg, saying that the disappearance of a specific word—“patient”— from the Fed’s statement may be code that a rate increase will come within the next two FOMC meetings. He reiterated the point in a subsequent speech, saying “I would take [“patient”] out to provide optionality for the following meeting…To have this kind of patient language is probably a little too strong given the way I see the data.” When Bullard, the man who told us months in advance to expect QE2, goes to great length to describe when the Fed will raise rates, I tend to pay attention.

While Bullard says the Fed could raise rates by June or July (and I wouldn’t rule that out), I think the likelihood is closer to September and that the central bank will likely raise rates twice this year. Whenever “lift off” actually occurs, we’ve long been anticipating that this day would come. It is a particularly interesting time for investors to consider increasing fixed-income exposure to high quality, floating-rate asset classes, such as leveraged loans and asset-backed securities. The good news is there is still time to prepare for when the Fed finally runs out of patience.

7 Social Security Mistakes to Avoid

SSA-image-2My Comments: Social Security payments are a critical financial component of many lives these days. When it began in 1935, there was much gnashing of teeth among the political parties since it represented a recognition by the government that some people needed help. This was in a world recovering from the Great Depression and watching the developing threat of Communism in the Soviet Union.

Today, many millions of us pay into the system monthly and many millions of us receive a check every month. Some of us, like a client of mine, has a permanent disability that he was born with and qualifies for help with living expenses. He has never been able to earn a living and few surviving family members to help him get by from day to day.

I readily admit to an element of socialism in this process. But I live in a world of rules imposed on us by society where society has deemed it to be in the best interest of the majority that those rules exist. Like making us all drive on one side of the road instead of at random. Think about that for a minute if you choose to believe that society should have no role to play in our lives or that socialism is inherently evil.

Okay, enough political chatter. Here’s useful information about claiming benefits from the SSA.

by John F. Wasik / FEB 17, 2015

Most clients get lost trying to navigate Social Security on their own. There are about 8,000 strategies available for couples and more than 2,700 separate rules on benefits, according to the Social Security Administration. Yet most couples don’t explore all the possibilities; as a result, they end up leaving an estimated $100,000 in benefits on the table, reports Financial Engines, an online money management firm.

For many advisors, talking to clients about Social Security often means having a brief conversation that ends with the traditional advice of “wait as long as you can until you file.” But Social Security, with its myriad filing-maximization strategies, should play a much larger role in a comprehensive planning discussion.

Consider these basic questions: How do you ensure a nonworking spouse reaps the highest possible payment? Should the higher earner wait until age 70 to receive payments? What’s the advantage of taking benefits at age 62? Should clients take benefits earlier if they are in poor health? How can divorcees claim a benefit based on an ex-spouse’s earnings?

Clearly, there are several right and wrong routes to maximizing Social Security benefits. Here are some of the most common mistakes and how advisors can address them.

1. Not planning for opportunity cost
What’s the cost of waiting to take Social Security? How will withdrawals from retirement funds impact clients’ portfolios?

Advisors need to understand how a Social Security claiming strategy will affect a client’s net worth, notes Ben Hockema, a CFP with Deerfield Financial Advisors in Park Ridge, Ill. “If you wait to take Social Security, that will mean withdrawing more money from a portfolio,” he says. “The Social Security decision involves trade-offs.”

Hockema runs Excel spreadsheets in conjunction with specialized Social Security software to show clients what opportunity costs look like in terms of lower portfolio values, displaying return assumptions with graphs.

Many financial advisors point out that the answer is not always to wait until 70 to take Social Security. You have to take a broader view.

2. Failure to consider family history
What are the client’s family circumstances? What do they expect in terms of life expectancy? Have other relatives been long-lived?

Even if answers are imprecise, the discussions can provide valuable insights into how to plan Social Security claiming, say advisors who are trained in these strategies. But it’s the advisor’s role to tease out that information, notes CFP Barry Kaplan, chief investment officer with Cambridge Wealth Counsel in Atlanta. “People often have no clue” about the best Social Security claiming strategies, Kaplan says. “It’s complicated.”

3. Not integrating tax planning

One key question to consider: What are the tax implications of a particular strategy, given that working clients will be taxed on Social Security payments?

Here’s how Social Security benefits taxation works: If your clients are married and filing jointly, and their income is between $32,000 and $44,000, then they may have to pay tax on half of their benefits. Above $44,000, up to 85% of the benefits can be taxed.

For those filing single returns, the range is from $25,000 to $34,000 for the 50% tax and 85% above $34,000. Be sure you can advise your clients on how to manage their income alongside their Social Security benefits.

4. Failing to ask about ex-spouses
Be sure to ask your clients about their marital history, understand what they qualify for and analyze how it will impact their cash flow. Was the client married long enough to qualify for spousal benefits? How much was the client’s ex making? Be sure to walk through different options with clients.

Kaplan offers the example of a 68-year-old woman who was twice divorced: “She was still working, and it had been 20 years since her last marriage,” Kaplan says. “I then discovered … a former spouse’s income that netted my client an immediate $6,216 — six months in arrears — and would result in an additional $1,036 per month until age 70, for a total [of] $30,000 in additional benefits.”

Kaplan’s divorced client was able to claim benefits based on her first spouse’s earnings, which boosted her monthly payment considerably.

5. Overlooking spousal options
A key question to ask: Does the “file and suspend” strategy make sense in your clients’ situation? In this case, the higher-earning spouse can file for benefits, then immediately suspend them, allowing the monthly benefit to continue to grow even if the other partner receives the spousal benefit.

The result: The lower-earning spouse can collect benefits while the higher-earning spouse waits until 70 to collect the highest possible payment.

6. Not taking advantage of new tools
Although specialized software packages can generate a range of benefit scenarios, only 13% of planners use subscription-based tools designed for Social Security maximization. (Most planners do have some comprehensive planning tools available, but they may not integrate Social Security scenarios.)

Most planners rely upon the free and often confusing calculators from the Social Security Administration, along with online calculators and general planning software, according to a survey by Practical Perspectives and GDC Research.

That’s despite the fact that only a quarter of planners “are comfortable enough to plan and recommend Social Security strategies to clients,” the survey noted.
A detailed conversation about Social Security may be even less likely to occur with high-net-worth clients, according to the survey.

When you approach Social Security with your clients, consider that there are multiple nuances within the system’s rules that few practitioners have studied, and these could result in higher payments. You may need some of the sophisticated tools now available.

7. Dismissing it altogether
There’s another reason clients — and often planners — don’t drill down into Social Security strategies: They don’t think it will be available in coming decades.

But don’t write it off altogether. The truth is that Social Security’s trust fund, the money held in reserve to pay for future retirees, is adequate to pay full benefits until 2033. If Congress does nothing to address the funding shortfall, the government will pay three-quarters of benefits until 2088.

And Social Security is one of the most successful and popular government programs in history, so it’s difficult to bet against its long-term survival.

David Blain, president of BlueSky Wealth Advisors in New Bern, N.C., suggests that, in addition to carefully reviewing benefit statements and earnings records, advisors should explore other aspects of Social Security, including spousal, death and survivor benefits.

“You need to take it seriously,” Blain says about integrating Social Security into a plan. “Clients may not understand it and think it’s not going to be there for them.”

John F. Wasik is the author of 14 books, including Keynes’s Way to Wealth. He is also a contributor to The New York Times and Morningstar.com.