Tag Archives: financial advice

Top 10 Phrases from Bank Lobbyists and their Translation

bear marketMy Comments: On April 6, 2016, rules were introduced into the US financial system that will cause more of us to treat our clients better. At least that’s the plan.

Wall Street firms have been resisting this change for years, and while the following Top 10 Reasons Why are tongue in cheek, there’s a whole lot more truth here than most of us choose to believe.

1) This new standard will limit investors’ choice of retirement options.
“This new standard will definitely limit my choice of yachts.”

2) Investors will “go it alone” and screw up their asset allocation.
“My Wolf of Wall Street theme party will have a totally inadequate seafood buffet.”

3) Rather than provide advice, advisors will sit on their hands for fear of legal reprisals associated with a fiduciary standard.
“Shhh. Don’t tell anyone there is a robust independent advisor ecosystem already available in the economy.”

4) New, innovative products will not be introduced to the marketplace.
“New, highly profitable, poor performing products will not be introduced to the marketplace.”

5) It’s not about the price you pay, but rather, the value you receive.
“It’s not about the price they pay, it’s about the soft dollars, revenue shares, and kickbacks we receive.”

6) Our legislative partners stand ready to protect investors and the middle class.
“We have taken every Congressman out for a lovely steak dinner and we will continue to do so.”

7) We have the best facilities in the world to provide cutting edge research and leading market insights.
“We pay the highest rent in Manhattan and hired a bunch of busted PhD students who can write fancy equations.”

8) Our robust advisor network fully leverages our economies of scale to provide superior service.
“We send our advisors canned reports and shoddy back office services and charge them 50% of their revenues.”

9) We have been in the business for centuries.
“We have been exploiting clients for centuries.”

10) Our clients see the value we provide. They understand that we are well worth the price.
“Please don’t go to Vanguard. Please don’t go to Vanguard. Please don’t go to Vanguard.”

How Retirement Advice Is About to Change

retirement_roadMy Comments: Retirement planning is one of the principal tasks of my practice. In fact, I will soon start teaching a new course sponsored by the American Financial Education Alliance (AFEA) to promote financial literacy. I’ve created a Chapter of AFEA here in Alachua County with my target audience people between the age of 55 and 70.

The article below speaks to the efforts of financial planners, against the headwinds created by Wall Street, to cause all advisors giving investment advice to be bound by ‘a fiduciary standard’. This means what we say and do and cause to happen MUST BE IN THE BEST INTEREST OF THE CLIENT.

This is the same standard that applies to doctors and lawyers and CPAs and even architects. Wall Street is moving heaven and earth to be exempted from this standard; they want to keep their employees bound first to their employer, and not the client.

By Matthew Kassel – April 3, 2016

A big rule change is coming from the Labor Department that will enforce tighter standards on retirement-account advice.

Six years in the making, the rules require brokers and other financial professionals offering retirement advice to operate under a “fiduciary” standard, meaning they have to keep their clients’ best interests in mind when giving advice on money in individual retirement accounts and 401(k)s. At the moment, brokers need only make “suitable” recommendations, which can lead to conflicts of interest, such as recommending items that may be fine for investors but that the broker has a stake in selling.

The regulations are meant to help investors make the most cost-effective savings decisions and get rid of hidden fees. But the pending standard—which may be completed as early as this week—could also reshape how investors do business with their financial advisers, brokers and industry analysts say.

Here’s a look at some of the ways the relationship may change.

1. A new layer of paperwork

One big change will affect IRA holders working with brokers who take commissions, says Stephen Wilkes, an attorney at San Francisco’s Wagner Law Group, which specializes in retirement law and represents brokers.

Under the fiduciary standard, commission-based accounts won’t be permitted unless investors sign a new type of agreement called a best-interest contract. This allows advisers to recommend investments they’re getting paid to sell, but only if it is in the client’s best interest and with detailed disclosure of the adviser’s potential compensation.

The Labor Department and some supporters of the best-interest-contract exemption, or BICE, in the brokerage industry say that BICE is practical and ensures that brokers can still receive commissions. Brokers, though, say some aspects of the contract require an onerous level of disclosures, and could add tension to the client-broker relationship.

“I’m fearful that the very investors we’re trying to protect might become more paranoid as we’re asking them to sign pieces of paper,” says Andrew Crowell, president of Crowell, Weedon & Co., a money-management firm in Los Angeles.

If investors don’t want to sign the contract, in some cases they can convert their IRAs to fee-based accounts, which don’t take commissions that entice advisers to operate in their own interest.

Brokers, however, argue the fees may be too expensive for some, especially if the investor is paying an adviser only sporadically for transactions, such as a brokerage account that holds only a target-date retirement fund. The added fees might then require investors to pay more for the same level of care.

2. Possibly getting dropped
Small investors with modest IRAs also face the possibility of getting dropped, brokers warn, since some advisers may not want to deal with the regulatory hassles required to hold on to less profitable accounts. According to a report by Fidelity Investments, 62% of 485 advisers surveyed say they plan to let go of some smaller, commission-based accounts or help them move to other firms.

“People are going to say, ‘Gosh, if I’m dealing with [a big investor’s] IRA with $1 million in it, I’m willing to jump through some hoops’ ” to comply with the rules, Mr. Wilkes says. “ ‘But what about Joe Middle America who has $35,000 in his IRA? Do I even want to bother?’ ”

3. Changing conversations
Another thing that will change is the complexion of the conversations advisers are allowed to have with their clients, says Fred Reish, a partner at Drinker Biddle & Reath who specializes in fiduciary issues.

Under the “suitable” standard, for example, brokers are free to make distribution recommendations to clients. Postregulation, an adviser who doesn’t have a signed BIC would only be allowed to educate clients about choices; he or she couldn’t recommend a client roll over money from a 401(k) to an IRA on which the adviser will earn compensation, because it would be considered a conflict under the new standard.

Mr. Reish says there isn’t a specific carve-out that would allow that transaction to take place, at least as the regulation was last laid out. So if the investor wants more advice, it will be hard for the adviser without a BIC to make a prudent suggestion without triggering the fiduciary standard.

Despite the hiccups analysts are envisioning, Chris Call, president of ABD Insurance & Financial Services Inc. in San Francisco, says the impending regulations will be good for the industry, getting rid of waste and excess compensation.

“On the whole, it’s an awesome thing,” Mr. Call says. “It’s going to save tons of money.”

Is Your House A Good Investment?

real estateMy Comments: My first house was in 1967 (I think). Since then I’ve had five more, all in the same town, with the current one a significant “downsizing” from #5. Of the first 5, only #2 was a good investment from a financial perspective. If your definition of “good” is wider, then all of them had a positive outcome on my psyche and my family members, if not my wallet. Whatever the case, these comments are useful food for thought.

By John Waggoner, InvestmentNews, March 28, 2016

For many Americans, a house is a place to lay your head, plant your petunias and evict your raccoons. For many people, it’s their biggest investment, too.

But how good an investment is it? And how do you persuade your clients that when it comes to making a housing investment, bigger isn’t necessarily better?

Many people hold to the belief that a house is a good investment. This is particularly true for high-income people who want to justify buying a big house. While there’s nothing wrong with wanting a nice house, there’s plenty of evidence that it’s not a great investment — and may even be a bad one in a recession.

Let’s start with home prices. The S&P/Case Shiller 20-City Composite Home Price Index peaked in July 2006 at 206.52 and has yet to fully recover. Its most recent reading was 182.75, or about 13% below its all-time high. The national median price of existing homes peaked in July 2007 at $230,400 and currently stands at $210,800, according to the National Association of Realtors.

Our first lesson here is that it takes a long time to recover from a bubble. This isn’t unique to housing bubbles: The Dow Jones industrial average didn’t beat its 1929 high until 1954. Nearly two-thirds of all surviving technology stock funds are still below their 2000 high.

But real estate bubbles are particularly painful since most people borrow to buy. A homeowner with a 20% down payment would have seen his or her entire principal wiped out in a 20% decline. And during the 2006 mania, the normal 20% down payment was a quaint relic of earlier days. (This is, incidentally, a hallmark of real estate bubbles. During the Florida land bubble of 1926, investors actually dispatched with closing on the property, instead trading purchase agreements secured by a nominal good-faith deposit. When the bubble broke, some startled orange farmers discovered they still owned their orange groves, now covered with half-built bungalows.)

Our second lesson is that over the very long term, housing provides modest price appreciation. Yale professor Robert Shiller, co-creator of the Case-Shiller indices, argued in a 2006 paper that houses essentially provide “negligible” real returns.

Your clients may have a hard time believing this. Shorpy.com, a site devoted to historical photographs, had a photo of house in Chevy Chase, Md., that had sold for $17,000 in 1919. According to Zillow.com, the house sold for $2.4 million in 2014.

That’s a lot of money, right? Well, it’s not bad. Over 95 years, it works out to a 5.35% average annual return. That’s much better than inflation, but less than the return from the Dow.

And even that 5.35% is a bit misleading. Houses require continual upkeep, which costs money. We can assume a home built in 1919 had been lovingly coated in lead paint for half a century, and that the same lead paint was expensively removed at some point. We can also assume that lead pipes had been removed, too, as well as any asbestos that may have been used in the floors and furnace. Speaking of the furnace, a house built in 1919 is probably on its fifth one, at least, as well as its fifth roof. And let’s not forget the annual cost of mortgage interest, property taxes and insurance.

Finally, there are other factors to consider when weighing a client’s large home purchase. Like the stock market, the housing market is a fair-weather friend, rising in good times and falling in recessions. Unlike stocks, however, houses are much more difficult to sell in hard times — and that means you might not be able to move to a new area for a better job if your house is underwater. According to the National Bureau of Economic Research, housing busts reduce homeowners’ mobility, on average, by 30%. In other words, if your client buys a large house and loses his job in a Steve Janachowski, a financial planner in Tiburon, Calif., noted that he’s also seeing clients who have too much house already. “They don’t have a lot of liquid assets in retirement and have too much of their resources tied up in their house,” he said.
Eventually, they will have to sell their house and look for a lower-cost place to live. “And they don’t want to,” he said. “They’re already living in their dream house.”

Naturally, there are many plus sides to home ownership: You get to deduct the interest on your mortgage, and when the housing market is rising, leveraging your purchase will amplify your gains. You can paint the living room any color you want without having to ask the landlord. And a paid-off mortgage is a wonderful thing in retirement. Nevertheless, unless you have a fair amount of good timing in your purchase, you can expect only modest price gains.

Many successful people like to own their own homes, and for many of them, a house is a not-so-subtle way to display their wealth. There’s probably not much you can do to dissuade them. But if your client is trying to justify a large house by saying it’s a great investment, in many cases, that just isn’t the case.

Prepare For A ‘Rockier Road Ahead’

bear-market--My Comments: Investing money for the faint of heart is at best, a guessing game. Too much in ‘safe’ bonds and you get hammered when interest rates rise. Too little in ‘risky’ stocks at the bottom of a market trough and you get hammered when the next upturn happens.

As explained here, the ups and downs have been muted for the last few years and that is probably going to change. If your money is not positioned to take advantage of more volatility, you may not lose your money, but you will almost certainly lose purchasing power. Expect interest rates to stay low and inflation to increase.

Richard Turnill, The BlackRock Blog

There’s the old adage that a picture is worth a 1,000 words. I couldn’t agree more. That’s why in my role as BlackRock Global Chief Investment Strategist, I’ll be sharing a chart each week, here on the BlackRock Blog and in my new weekly commentary, that focuses on a key theme likely to shape markets in the weeks ahead.

Here’s this week’s chart below. It helps show why current low levels of stock market volatility look unsustainable; or, in other words, why now is a good time to prepare portfolios for a rockier road ahead.

The Federal Reserve’s (Fed) quantitative easing (QE) program—twinned with liberal doses of QE by other central banks—dulled market volatility to unprecedented low levels between 2012 and 2014. This period of exceptionally low volatility ended last year, as the Fed wound down its QE purchases and began to raise rates.

However, as evident in the chart above, markets have become eerily quiet recently. U.S. equity market volatility, as measured by the VIX Index, is hovering around its lowest level since August 2015 and is well below its long-term average.

This unusual calm follows declining market concerns about sliding oil prices, and the health of European banks and China. I do not expect this calm to last, and I see a return to the higher-volatility regime that was the norm prior to QE.

Why? The future path of monetary policy remains uncertain, and tail risks remain. A big Chinese yuan devaluation isn’t BlackRock’s base case, but it’s still a downside risk. Geopolitics, particularly as Europe confronts terrorism and migration, could also spark volatility. So, too, could rising global and U.S. inflation expectations.

How can you prepare? Gold can be an effective hedge if volatility spikes due to rising U.S. inflation fears, according to BlackRock analysis. I also like Treasury Inflation-Protected Securities (TIPS) and similar instruments. For more on what to watch in the week ahead, be sure to read my full weekly commentary.

The Biggest Force Powering The Stock Market Is Starting To Disappear

roller coasterMy Comments: This is important if your financial future depends to some degree on retirement accounts that include investments in the stock and bond markets. If you think the turmoil is going to end soon, you should perhaps think again.

Bob Bryan March 11, 2016

Since the beginning of the post-crisis bull-market run (2009), the biggest buyer of equities hasn’t been retail investors or institutions but companies themselves.

Companies have been supporting the stock market through buybacks for years.

But according to some analysts, the era of buybacks may be coming to a close.

And this could be terrible news for the stock market.

According to a note from analysts at HSBC, buybacks have been the source of most of the demand for stocks since 2009.

The note said that for each of the past two years, companies in the S&P 500 have bought back nearly $500 billion of their own stock and a total of $2.1 trillion since 2010.

This huge amount of buying has been a massive source of upside for the stock market, said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“There’s no question that by far corporate buybacks have been the source of most of the buying in the stock market,” Sonders told Business Insider on Wednesday. “On a cumulative basis there has not been a dollar added to the US stock market since the end of the financial crisis by retail investors and pension funds.”

Jonathan Glionna, equity strategist at Barclays, laid out just how important this has been to equity markets, comparing the boost from buybacks to the Fed boosting the bond market through quantitative easing.

Read the full article and see the charts HERE

Grab This Social Security Benefit While You Still Can

My Comments: Social Security has for many years been a critical financial component in the lives of almost every citizen of the US who is aged 62 or older. I know it is for me and my wife.

Changes are going to happen to help maintain it’s viability as the population demographics change and society evolves. What you read below may confuse you, but if some of the variables described apply to you, you need to understand this rule change as it could mean lots of money for you, both good and bad.

Philip Moeller February 18,2016

Q: I plan to file for Social Security in November 2016. I will turn 66 on November 24, 2016, and my wife will turn 66 on February 24, 2017. We had planned to have my wife file a restricted application for Social Security as of February 2017 and, at age 70, switch to her retirement benefit. In consideration of changes to the law, will this option still be available to us as of February 2017? — Ken

A: Yes, this strategy will still be valid under the new law. Because your wife was already 62 at the start of 2016, she is grandfathered under the new regulations. Once you’ve filed for your benefit, she will be able at her full retirement age (FRA) to file a restricted application just for her spousal benefit and then at age 70 file for her own retirement benefit. Assuming it will be larger than her spousal benefit, she should receive an additional payment that is roughly equal to the amount by which her retirement benefit exceeds her spousal benefit.

Under the old rules, you would have been able to file and suspend at your FRA. That would have permitted her to file a restricted application and allowed both of you to defer your own retirement benefits and thus earn delayed retirement credits. The ability to file and suspend will no longer be provided to people who have not reached full retirement age by the end of April (April 29, to be exact, which is the last business day of the month).
SSA-image-2
These new changes add yet another layer of complexity to what was already a challenging set of Social Security claiming decisions. And wishing the system were simpler won’t make it so. Still, by asking the right questions, as Ken has done, it’s still possible to arrive at the best outcome.

TAX ESSENTIALS

income taxMy Comments: I think I found this article published in Medical Economics some months ago. I apologize for my inability to provide accurate sourcing. That aside, we have ZERO obligation to pay more in taxes that absolutely necessary.

Just remember, the IRS has a responsibility to collect taxes. It’s up to us to figure out legitimate ways to NOT pay taxes. The burden of compliance is on us as taxpayers, so don’t expect the IRS to wave any flags that say “no taxes are necessary”. It’s not going to happen. Here’s the text I found:

Since 2001, the tax code has undergone 4,680 changes—an average of more than one change per day. Even worse, physicians are paying more in taxes. Because of these trends, intelligent tax preparation has become essential, not optional.

To help, some changes in U.S. tax laws are highlighted in this article. This is by no means a complete list, but identifying strategies for dealing with these areas represents a big step to creating to a solid tax strategy.

On New Year’s Day 2013, the Bush-era tax cuts expired. Now the rich pay more (or are supposed to.) The top tax rate for individuals earning $400,000 or more, and married couples filing jointly earning $450,000 and up, is 39.6%. This is the highest rate in nearly 15 years.

Capital gains rates also increased under the same “fiscal cliff” deal. The wages of individuals earning more than $200,000 ($250,000 for married couples), now are subject to Medicare surtax. This will be tacked on to wages, compensation, or self-employment income over that amount. The surcharge is .9%.

There is not much to be done about these increases, which were a long time coming and received bipartisan support. While taxes can’t be eliminated altogether, they can be significantly reduced with proper preparation. Such preparation may include structured trusts, limited partnerships and other legal entities.

Another tax is the net investment income tax, under which individuals earning $200,000 ($250,000 for couples) may now owe more. Taxpayers with net investment income and modified adjusted gross income (AGI) will likely pay more. Net investment income encompasses: income from a business, dividends, capital gains, rental and royalty income, and/or interest.

Depending on any business or investment activities outside your practice, there may be circumstances where you owe more. Be sure to check with a professional to assure all income outside of your medical practice is accounted for appropriately. Please note that wages, unemployment compensation, operating income from a non-passive business, Social Security, alimony, tax-exempt interest, self-employment income, and distributions from certain Qualified Plans are excluded—for now.

In addition, personal exemptions (PEPs) for high earners may be eliminated. The phase-out of the personal exemption affects individuals with adjusted gross incomes of more than $254,200 and $305,050 for married taxpayers. They end completely for individuals who earn $376,700 or more and $427,550 for married taxpayers. While PEPs are generally a drop in the bucket for high earners—it was only $3,950 in 2014—it’s a lost deduction that can add up over several years.

Interestingly, while the definition of marriage is decided by individual states, the Internal Revenue Service recognizes a legally married same-sex couple in all 50 states, no matter what their legal status is in their home state. This can affect tax, estate, legal, and charitable planning.

Savvy estate planning for all married couples and individuals may involve various types of trusts, such as a charitable-lead trust. When created and structured properly, the charitable-lead trust earns an immediate tax deduction, avoids taxes on appreciated assets, and may provide an inheritance for heirs later.

A charitable-remainder trust potentially avoids capital gains taxes on appreciated assets, allows you to receive income for life, and provides a tax deduction now for your future (posthumous) charitable contribution. For large, significant charitable gifts, donating appreciated stocks or mutual fund shares (provided you’ve owned them for over 366 days) is a way to boost your largesse.

Under IRS rules, the charitable contribution deduction is the fair market value of the securities on the date of the gift—not the amount you paid for the asset. And there is no tax on the profit. This only works for assets that have appreciated in value, not for those on which you have a loss.

Now for the good news: You may be able to benefit from Tax-Free Education Reimbursements for continuing medical education (CME) via a Section 127 educational assistance plan, depending on the way your practice (or your employer’s practice) is structured.

If you are an employee and your employer does not pay for the CME, it is considered a miscellaneous itemized deduction subject to the 2% AGI limitation. Under this scenario it is better to negotiate to have your employer pick up the costs. Then it is a deduction for the employer and nontaxable to the employee.

If your practice is a sole proprietorship or a single-member LLC, than the cost should be deducted on your Schedule C, and is a deduction from AGI (and self-employment tax). If the practice is a multi-member LLC, partnership, or S corporation, it is best for the entity to pay the expense. Doing so reduces the flow through income from the entity and effectively reduces AGI.

Under the partnership scenario (or an LLC taxed as a partnership), if the operating agreement states that the expense must be paid by the partner/member and that the entity will not reimburse the costs, then the expense can be deducted on Schedule E of your tax return (thus reducing your AGI). This treatment is not available to an S corporation.

The conversion privilege for Roth individual retirement accounts (IRAs) continues. Converting a traditional IRA into a Roth account is treated as a taxable distribution from the traditional account with the money going into the new Roth account. The result of this conversion is a larger federal income tax hit (a larger state tax hit is also likely).

But the benefits may outweigh the extra money owed. At age 59½, all income and gains accrued in the Roth account can be withdrawn free from federal income taxes, provided at least one Roth IRA has been open for more than five years.

In the event that future federal income tax rates rise, the Roth IRA’s balance isn’t affected. Provided the account is over five years old, if you die, your heirs can use the money in your Roth account without owing any federal income tax. And unlike traditional IRAs, Roth IRAs are exempt from required minimum distribution (RMD) rules applied to other retirement accounts, including traditional IRAs.

Under the RMD rules, you must start taking annual withdrawals after age 70½ and pay the resulting taxes. But you can leave Roth IRA balances untouched for as long as you wish and continue earning federal-income-tax-free income and capital gains. And there is no income restriction on Roth conversions: Everyone, no matter their income, can do them.

Selling a home may be excluded from tax. How? Suppose an individual sells a primary residence. She or he may exclude up to $250,000 of gain. A married couple may exclude up to $500,000.

There are a few caveats, however. Principal ownership of the property, for at least two years during the five-year period ending at the sale date, is required. Also, the property must have been a primary residence for two years or more during the same five years. The maximum $500,000 joint-filer exclusion requires at least one spouse to pass the ownership test; both need to pass the use test.

Regarding previous sales, if gains from an earlier principal residence sale were excluded, there is typically a wait of at least two years before taking advantage of the gain exclusion provision again. Married joint filers may only take advantage of the larger $500,000 exclusion if neither spouse claimed the exclusion privilege on an earlier sale within two years of the ¬latter.

There is also positive news regarding the dependent care credit. If you employ child care for one or more children under the age of 13 so that you can work (or, if you’re married, you and your spouse can work), you may be eligible for this credit. Affluent families receive a credit equaling 20% of qualifying expenses of up to $3,000 for one child, or, up to $6,000 of expenses for two or more. The maximum credit for one child is $600; for two or more it’s $1,200.

The credit is also available to those who incur expenses taking care of a person of any age who is physically or mentally unable to care for themselves (i.e., a disabled spouse, parent, or child over the age of 13).