Wednesday, May 27, 2009

Florida Seniors Annuity Bill Dies in Committee

How does a bill to protect Seniors from unscrupulous annuity peddlers die in committee in the Florida House? Especially, after it passed 39 to 0 in the Florida Senate? It says on the Florida House web site that the Annuity Contracts for Seniors died in committee. Which committee? The Insurance, Business and Financial Affairs Policy Committee killed it on May 2, 2009. They also said that it was indefinitely postponed and withdrawn from consideration.

Why on earth would a bill that passes 39 to 0 in the Florida Senate get totally dismissed in the Florida House? We can only speculate that the insurance lobbying efforts were powerful and successful in squashing this bill to protect Seniors.

This bill would have limited all annuity contracts to 10 year surrender charges. It would have made it a felony to twist and churn Seniors out of their money to buy Annuities. Perhaps the biggest item in the bill was that if an insurance agent had previously lost their securities license, then they would automatically lose their insurance agent's license. Apparently, there are scores of insurance agents in Florida who have lost their securities licenses, but continue to do business as insurance agents. It seems to this humble blogger that getting rid of these insurance agents would be a good thing.

The first sign of a chink in the armor was when in the Senate version, the maximum surrender charge period was expanded from 5 years to 10 years. Alex Sink, CFO for the State of Florida wanted the 5 year surrender period, but it appears the insurance lobby won out by expanding that to 10 years.

Oh, the world of politics. Should we really be surprised that this bill died in the Florida House? I think not. What we have here folks, is an example of the insurance lobby at work. Not only were they successful in killing the bill, they were also successful in giving unscrupulous insurance agents new life to continue their misdeeds.

Friday, May 22, 2009

What They Are Teaching in Law School

I went to an ethics meeting recently where the guest speaker was a law school professor. The attendees were attorneys, CPA's, CFP's, CLU's, Trust Officers and others. He talked about a lot of things, but one of the things he mentioned was related to joint tenants with rights of survivorship (JTWROS) accounts. He made the statement that he would never recommend that married couples open a JTWROS account. He said it would be better to open Tenants in Common accounts where the husband owns 50% of the undivided interest in the account and the wife also owns 50% of the undivided interest in the account. He went on to say that this was an easy way to split assets for estate planning purposes. If everything is in a joint account, then at first death, there are no assets that use the estate tax exemption. This was his reasoning. At first glance, this might make sense, but perhaps your humble blogger might be able to provide better alternative solutions.

What he did not explain to the attendees is that there are better solutions than putting married couple assets in Tenants in Common accounts. In addition, Tenants in Common accounts could own real estate and a Tenants in Common share is of an undivided interest. If one spouse were to die, then their property share would need to be sold. This might cause a loss in value, especially in a real estate market similar to today. This is not smart.

As you may or may not know, Tenants in Common accounts are subject to probate. Who benefits by probate? Attorneys, of course.

One alternative solution is to open individual accounts for the husband and wife and add payable on death clauses to them. This way you take advantage of the estate tax exemption and you bypass probate saving a minimum of 3% in most states.

Another solution is to draft Living Trusts for both the husband and the wife. There is better control of the disposition of assets and you can take advantage of the estate tax exemption. Living Trusts also bypass probate and their associated expenses.

There were some uneducated financial advisors in the room that were actually thinking about implementing the law professor's strategy of using Tenants in Common accounts. The law professor's argument was biased in favor of locking in future legal fees for the attorneys. I do not begrudge attorneys for earning their legal fees, but they should do so ethically. To me, it is just not ethical to follow the law professor's advice when better solutions are available at little or no cost.

No wonder they call Tenants in Common accounts TIC's. They can suck the blood right out of you.

Wednesday, May 13, 2009

Why Losing 20% is Better Than Losing 40%

Nobody wants to lose money. Let us assume that we have two hypothetical investors. One investor likes to invest on their own and they do not have a history of moving to cash. Instead, they choose to stay fully invested through both bull and bear markets. We will call this investor Foolly Investor.

The other investor is more conservative and does not risk as much in the stock market. This investor has read my book and limits his investments in any one asset class to 20% or less. In addition, they learned by reading my book, that they should never have more than 65% in stocks or equities. Particularly, they learned that 65% is an aggressive position and they are conservative and may only put 50% into stocks or equities. We will call this investor KYATMA Investor.

Foolly Investor was a fool to have 80 to 100% in stocks or equities. Foolly Investor's first mistake was investing based on only bull market possibilities. He failed to realize that markets not only go up, but they also go down. In addition, he did not understand the dynamics of investing with regard to the range of possible returns. Fooly Investor did not know that if a mix of investments has the potential to fall within a range of 0 to 25% on the upside, it has the potential to lose 0 to 50% on the downside. There is not an equal distribution of returns above zero and below zero. A fully invested portfolio will accelerate it's losses on the downside in a bear market environment. More people are selling in a bear market which compounds the losses on the downside. Foolly Investor only looks at the upside performance possibilities and completely neglects the possibilities on the downside.

KYATMA Investor is smart now that they have the knowledge packed into my book, Keep Your Assets Take My Advice. KYATMA Investor understands that when investing, you have to invest for both good and bad markets. In addition, you have to have a plan and a process that you follow. KYATMA Investor's plan is to diversify across many asset classes such as Large Company, Mid Cap Companies, Small Companies, International, Emerging Markets, Precious Metals, Commodities, Real Estate, Short Term Bonds, Intermediate Term Bonds, Aggregate Bonds, Treasury Inflation Bonds and Cash. In addition, he limits his exposure in each of the assets classes to the scale of limitations described in Rick's book.

KYATMA Investor ignores the recent bad press that says Asset Allocation does not work, because he understands that the people espousing that opinion have a hidden agenda. KYATMA Investor knows that a properly designed Asset Allocation does work, because he has had positive experiences in both bull and bear markets.

In the recent bear market of 2008, Foolly Investor lost 40% of his investment. KYATMA Investor lost 20%. Normally, Foolly type investors would think that KYATMA out performed Foolly by 20%, because their 20% loss minus Foolly's 40% results in a difference of 20%.

However, KYATMA's followers know their math. KYATMA followers know that if they outperformed Foolly on the downside by 20%, then this means that Foolly has to make about 40% just to catch up to KYATMA. That is assuming of course that KYATMA does not make anything while Foolly is making that 40%. KYATMA knows that if Foolly is making 40%, then KYATMA will also be making a good return. Therefore, the real number of Foolly catching up to KYATMA would be even higher than 40%.

Oh by the way, to recoup KYATMA's original investment, KYATMA only has to make 25%. Foolly has to make 66.67% to recoup their original investment.

Let us do the math, shall we?

  • KYATMA has $100,000 and Foolly has $100,000 to start.
  • KYATMA loses 20% so they are left with $80,000.
  • Foolly loses 40% so they are left with $60,000. (Foolly foolishly believes that KYATMA only outperformed him by $20,000.)
  • In order for KYATMA to get back to $100,000, they would have to earn 25%. ($80,000 x 25% = $20,000 added back to the $80,000 makes KYATMA whole at $100,000.)
  • Foolly on the other hand, had to do the calculations twice before he realized what a fool he had been. Foolly had lost down to $60,000. In order to make it back to $100,000, Foolly does his calculation and finds that he has to make 66.67%!! KYATMA outperformed him by 41.67%!!
  • Foolly grudgingly realizes that $60,000 x 66.67% = $40,000 which will get him back to his original $100,000.

Foolly Investor asked KYATMA Investor for some advice. KYATMA said, "Buy Rick's book!"

Tuesday, May 12, 2009

Understanding Performance Mistakes

Suppose a hypothetical investor meets with a financial advisor hereinafter referred to as Advisor A. Advisor A describes his investment process as based on sound Asset Allocation principles with a slant towards being conservative. Further he provides evidence that he will take large cash positions in bear markets when necessary based on their portfolio management experience. In addition Advisor A says that for the last 5 years, their performance was 5%.

Our investor is unimpressed with a 5% return. Our investor is searching for a financial advisor with a 10% return. The first mistake that this investor makes is that they have no frame of reference. That 5% may have actually outperformed the market by a significant margin, but they will never know because they were fixated on 10%.

Nevertheless, our hypothetical investor seeks out another financial advisor, Advisor B. In a meeting with Advisor B, our investor hears about a 10.41% return. Our investor gets excited because this is more in line with their investment performance objective. Advisor B tells our investor that they have a proprietary strategy using options, stocks and hedging positions in order to produce their returns. The proprietary strategy is a secret to the firm and they cannot share it for fear that the competition may try and duplicate it. Advisor B shows their track record for the last 5 years and it is 10.41%. Unfortunately, our hypothetical investor jumps all over this and opens several accounts with Advisor B. This would be a mistake without further investigation.

What is wrong with this picture?
  • Advisor B's strategy is a secret. - Bernie Madoff's strategy was a secret too.
  • Advisor B made large bets on the energy sector. - The energy sector is in a bear market now and our investor is completely unaware how this firm achieved the 10.41% return. The odds of Advisor B making 10.41% for the next 5 years would be next to impossible if they are primarily an energy sector manager and the energy sector is in a bear market.
  • Our investor made as his goal 10%. - There is no guarantee of future performance from any financial advisor. Picking a number by the investor is fraught with peril.
  • Our investor completely discounted Advisor A because the 5% return was not the 10% that they wanted to make. - Our investor made a decision not to invest with Advisor A based on an unrealistic expectation.
What our hypothetical investor should have asked:
  • Will you prepare a Comprehensive Financial Plan for me?
  • What types of investments do you recommend that I invest in?
  • What kind of strategy or strategies do you use? Please explain your strategy(s).
  • What are the fees associated with your recommendations?
  • What will be the tax implications of your recommendation?
  • What conflicts of interest do you have?
  • How are you compensated? Fees, Commissions or a Combination?
  • Can you be hired on an hourly or retainer basis?
  • How do you make investment decisions after accounts are invested initially?
  • How will additional investments be handled?
  • Have you ever gone to cash? If so, why?
  • Where will my accounts be held? What custodian or firm?
  • What protections do you have in place for the safety of my funds?
  • What licenses do you hold? What designations do you hold?
  • Have you ever had a license or designation subject to any type of disciplinary action?
  • What can you provide me as verification of a background check and the background check for all principal members of your firm? (Those with access to my accounts.)
  • Where are your written disclosures? Please provide in writing for my review.

This is a short list of good questions to ask any Financial Advisor. Of course, there are other questions to ask in addition to these. It depends on your personal situation.

I trust that you can see now why seeking a 10% return is the absolute wrong way to go about choosing a financial advisor. A Comprehensive Financial Plan is what you should demand as your starting point. You need to look at the entire balance sheet which is Assets and Liabilities. You need to understand the plan and the process that goes into designing the financial plan for your needs. Believe me, you will be much better off with a Financial Plan.

Please feel free to comment.

Sunday, May 10, 2009

Larry Doyle's Sense on Cents Radio Show

I had the distinct honor and privlege to be a guest on Larry Doyle's radio show, Sense on Cents which is on No Quarter Radio, BlogTalkRadio. The show aired Sunday, May 10th at 8 pm. An archive of the show is available on LD's web site at It can be downloaded to iTunes or shared in other ways.

Listen to it. You will be glad that you did. Look for the May 10th show.

Wednesday, May 6, 2009

Fiduciary Standards Battle is Heating Up

I recently sent out a press release on how consumers are caught in the crossfire between FINRA and the Financial Planning Coalition which consists of the CFP Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.

FINRA is trying to gain control of registered investment advisers from a supervisory role. In addition, they are trying to portray themselves as consumer friendly and in favor of a fiduciary standard. The problem is . . . a fiduciary standard does not allow you to sell from inventory. In addition, it would be a huge stretch to say that buying an illiquid limited partnership that pays a FINRA registered representative an 8% sales commission is in a client's best interest. Neither would having sales quotas to keep your office stipend or qualify for a trip to Cancun be in a client's best interest. This is clearly in the best interest of the FINRA registered representative. Just because the FINRA registered representative is wearing an Registered Investment Adviser hat, makes no difference since the later transactions related to sales quotas and trips clearly fall outside what it means to be a fiduciary.

If FINRA was really in favor of consumers, then they would tell their members that there will no longer be any FINRA broker/dealers and all product commissions will be eliminated. FINRA should also recommend to all its members that they all should register as registered investment advisers. Of course, if they do not do this, then it is obvious that FINRA is putting their own interests and the interests of its members ahead of consumers. They cannot spin it any other way. However with their political clout, I am sure they will find a way.

In the end, if registered investment advisers do not fight this and fight this hard, then consumers will lose and registered investment advisers will lose.