Have you ever wondered why tuition at colleges and universities does not ever seem to go down? There is a reason for it. The reason is the availability of student loans. At first glance, having money readily available for student loans appears to be a good thing. However, once you peel back the onion, then you will discover it is actually a bad thing.
When you think critically about this issue, then that is when you have the "ah ha!" moment. If you are a college and you know that anyone that wants to attend your institution can get a student loan, then why would you ever have to worry about competition from other colleges and universities? Now, I understand that there is some competition, but with a guaranteed pool of money flowing into the college from student loans, this minimizes the competitive effect.
From the college's perspective, why would you ever have to lower your tuition, if you know that there is an ever increasing pool of funds to keep your tuition high? Why should there be any accountability to your teachers and professors? Their poor performance does not matter. They will get paid no matter whether they are a good teacher or a bad teacher, because of the flow of student loan money.
Those of you who attended college will recall your own experiences. I am sure that you, like me, had teachers who simply did not care about how you performed in their class. They were just going through the motions, sometimes not even showing up for their class. These teachers could care less whether you passed their course. There was no scrutiny for their performance and because of readily available student loans, they never had to worry about getting paid.
I recall one Economics teacher who made me so mad, that I actually complained to the Dean of the department about him. When the course began, I went to him and asked him if it would be helpful to buy the study guide and CD that were companions to his text book. He told me "Absolutely. Feel free to purchase them," he said.
As the first test of the semester approached in his class, I studied my tail off because I wanted to make an "A" in this class. When I sat down for the test, I looked at the questions and realized that this test had no relationship whatsoever to the chapters we were told to study in our textbook. Come to find out, the teacher used a different textbook than the one he told us to study. What? Are you kidding me? I am studying chapters 1 through 5 in one textbook and he is giving us a test on chapters 1 through 5 in another text book. I was incensed. Why didn't this idiot for a teacher tell us to use the other text book? His answer was..."economics is all the same no matter what text book you study." Yes, you idiot, but if the subject matter on the test is not the same material as the subject matter in the book then that is an unfair advantage for students.
I was so incensed over this idiot, I wrote to the Dean complaining. Of course, not a response from the Dean. No accountability whatsoever. I took four courses that semester and I made three "A's" and a "B" in the Economics class. If I had the right text book, I am certain that I would have made an "A" in Economics. However, this idiot for a teacher eliminated any opportunity that I had at that achievement by pulling the switcheroo with the text books. As you can see, I am still ticked off about it many years later. Teachers like these have no accountability, no fear of losing their jobs and simply do not care how well their students perform. The easy availability of student loans is a major contributor to these problems.
There is starting to be some cracks in the armor of these colleges and universities. Parents and students alike are rethinking this student loan fiasco. Smarter parents are sending their kids to community colleges for the first two years, then on to the big name college the final two years. This saves a lot of money in tuition.
Other parents, who have the ability, are paying as you go, instead of defaulting to getting a student loan. Why saddle your kid with all that debt? It simply is not worth it.
Life insurance policies are being used in unique and novel ways to pay for college. There are a few whole life insurance policies out there that have special 100% cash riders on them. They work in this manner. The whole life insurance is applied for on a parent and the death benefit covers the risk of a premature death and having the funds available for college. The 100% cash rider is added to the whole life policy where parents can dump in money that can be withdrawn at any time for college expenses. The whole life policy with the 100% cash rider acts as the parent's own student loan pool. The parent is in effect borrowing from themselves and paying themselves back. These policies work for any kind of debt, but are especially appealing for college education expenses.
We will not see any real changes in tuition at colleges and universities until the student loan funds dry up. Colleges and universities can raise tuition year after year as long as the student loan money keeps flowing. Perhaps, it is time for parents to rethink this madness. Perhaps, it is time for a different plan of attack.
Perhaps, it is time to see a Certified Financial Planner®.
Thursday, September 6, 2012
Wednesday, August 22, 2012
The Three Villains
Who are The Three Villains? Banks, Wall Street firms and insurance companies. Why? Because they do not care about anything but making revenue off of your money. Do not be fooled into believing anything otherwise.
Often as part of our services to new clients, we run an analysis on their existing investments. If I know that they do business with one of The Three Villains, I can almost predict what they are going to hold in their portfolios. Typically, they will own things on my Do Not Buy List. (Search this blog for my Do Not Buy List.) Things like UIT's that pay 2.95% commission. Things like variable annuities with guaranteed withdrawal benefits. Variable annuities with 10 year or sometimes longer surrender charges that pay 6 - 10% in commissions. Let us not forget Non-Publicly Traded REIT's (Real Estate Investment Trusts) that pay around 8 or 9% in commissions. Of course, last but not least, the Class A share Mutual Funds that pay as much as 5.75% in commissions.
I can literally close my eyes and write those four investments (don't make me laugh) down on a piece of paper and I would be able to check off at least three of these every time someone does business with one of The Three Villains. Usually, I can guess which of the four investments they own, by virture of which one of The Three Villains that they have their accounts with.
By the way, approximately 85% of every investor out there does business with one of The Three Villains. Yes, that means there is an 85% chance that you are a victim of The Three Villains.
It all boils down to one thing that guarantees that the deck is stacked against the average investor. Any registered representative that works for one of these Three Villains has to produce enough revenue to keep their jobs. In other words, they have a Quota to hit. If they do not hit their Quota, then they can be fired. These Quotas can be as much as $250,000 to $300,000 per year! This means that these registered representatives need to produce that much in commissions and fees for their Villain firm each and every year!
Now, ask yourself this question. How does my advisor, who works for one of The Three Villains, look out for my best interests? Do not tell me that your advisor is different. The truth is, like or not, that your advisor, who works for one of The Three Villians is most likely raking you over the coals.
Another critical point.
The liquidity factor is very important, in my opinion. Why do you want to invest in something that is not liquid? In this economic environment, that would be foolish. Let me repeat that. In this economic environment, that would be foolish. Three of the four investments mentioned above are illiquid, have penalties for early withdrawals, or have surrender charges.
Can it get even worse?
Sadly, it can. The typical variable annuity today is sold with roughly 2.6% in expenses and charges. Then, when you add on multiple guaranteed-withdrawal and guaranteed-stepped-up death benefit riders, you are adding probably another 1 or 2% on top of that. I routinely analyze variable annuities with these riders and in almost all cases, the expenses are north of 4% and closer to 5%. It is easy to make money when you are paying out 4 or 5% in expenses, isn't it? (I am being facetious.) Why in the world do you want to keep a variable annuity that is going to cost you 4 or 5% each year?
Think about this fact. If you give them your money and they charge you the laughing low figure of 4% in expenses and invest that for 20 years, the odds are they might be able to give you a guaranteed-withdrawal benefit of 5%. They are doing it WITH YOUR MONEY!!!
By the way, do not tell me that the reason you will stick with your variable annuity is because of the guaranteed-withdrawal benefits. Insurance companies are under pressure and some of them are writing their clients asking to be let go of those guranteed obligations in exchange for cash. I would not count on your guarantees, if I were you.
Non-Publicly Traded REIT's are built like Ponzi schemes. They take your money then generally, take a big chunk off the top for management and commissions. Then, they pay you back your capital as a "income stream". What a joke. You cannot sell these investments once you buy them for anything close to what you put in. Typically, you have to wait 10 years or more to even have a chance at getting some of your money back. Lots of times, the failing Non-Publicly Traded REIT's are rolled up into another REIT and you had no idea that this could even happen. I have seen people who thought they were going to get an 8% dividend, suddenly find after a roll up that their dividend is cut in half. Would that make you mad? Mad enough to want your money back? Sorry, you have to wait 10 years or more to hope and I do mean hope that you might get 80% of it back.
You are probably thinking that your advisor would not do that to you. Think again. They have that Quota, remember? If your advisor is like most, the only thing he or she really knows about a Non-Publicly Traded REIT is that it pays him 8.5% commissions. They do not know all the bad stuff I just described.
Mutual funds are okay, aren't they?
Sorry to disappoint you, but after your advisor makes his cut of your 5.75% commission, then you have ongoing 12(b)-1 expenses and management fees that can be north of 1% per year. I have seen instances where registered reps have made their 5.75% commission, then months later come back to you and put you in an assets-under-management account for 1.5% a year. So, now, you have paid the 5.75%, you are paying 1% plus in fund management fees, then on top of that, you are paying your advisor 1.5% a year. So, after two years, you may have paid 8.25% or more to be with your advisor.
Is this picture getting any clearer for you? I hope so.
Unfortunately, 85% of the people walking around out there are getting advice from The Three Villains.
You can stop the madness. Here is how. We can run an analysis on your investments to show you the truth. Feel free to contact me if you are in FL, IN, KY or TX. I can prove it to you.
RJ
Often as part of our services to new clients, we run an analysis on their existing investments. If I know that they do business with one of The Three Villains, I can almost predict what they are going to hold in their portfolios. Typically, they will own things on my Do Not Buy List. (Search this blog for my Do Not Buy List.) Things like UIT's that pay 2.95% commission. Things like variable annuities with guaranteed withdrawal benefits. Variable annuities with 10 year or sometimes longer surrender charges that pay 6 - 10% in commissions. Let us not forget Non-Publicly Traded REIT's (Real Estate Investment Trusts) that pay around 8 or 9% in commissions. Of course, last but not least, the Class A share Mutual Funds that pay as much as 5.75% in commissions.
I can literally close my eyes and write those four investments (don't make me laugh) down on a piece of paper and I would be able to check off at least three of these every time someone does business with one of The Three Villains. Usually, I can guess which of the four investments they own, by virture of which one of The Three Villains that they have their accounts with.
By the way, approximately 85% of every investor out there does business with one of The Three Villains. Yes, that means there is an 85% chance that you are a victim of The Three Villains.
It all boils down to one thing that guarantees that the deck is stacked against the average investor. Any registered representative that works for one of these Three Villains has to produce enough revenue to keep their jobs. In other words, they have a Quota to hit. If they do not hit their Quota, then they can be fired. These Quotas can be as much as $250,000 to $300,000 per year! This means that these registered representatives need to produce that much in commissions and fees for their Villain firm each and every year!
Now, ask yourself this question. How does my advisor, who works for one of The Three Villains, look out for my best interests? Do not tell me that your advisor is different. The truth is, like or not, that your advisor, who works for one of The Three Villians is most likely raking you over the coals.
Another critical point.
The liquidity factor is very important, in my opinion. Why do you want to invest in something that is not liquid? In this economic environment, that would be foolish. Let me repeat that. In this economic environment, that would be foolish. Three of the four investments mentioned above are illiquid, have penalties for early withdrawals, or have surrender charges.
Can it get even worse?
Sadly, it can. The typical variable annuity today is sold with roughly 2.6% in expenses and charges. Then, when you add on multiple guaranteed-withdrawal and guaranteed-stepped-up death benefit riders, you are adding probably another 1 or 2% on top of that. I routinely analyze variable annuities with these riders and in almost all cases, the expenses are north of 4% and closer to 5%. It is easy to make money when you are paying out 4 or 5% in expenses, isn't it? (I am being facetious.) Why in the world do you want to keep a variable annuity that is going to cost you 4 or 5% each year?
Think about this fact. If you give them your money and they charge you the laughing low figure of 4% in expenses and invest that for 20 years, the odds are they might be able to give you a guaranteed-withdrawal benefit of 5%. They are doing it WITH YOUR MONEY!!!
By the way, do not tell me that the reason you will stick with your variable annuity is because of the guaranteed-withdrawal benefits. Insurance companies are under pressure and some of them are writing their clients asking to be let go of those guranteed obligations in exchange for cash. I would not count on your guarantees, if I were you.
Non-Publicly Traded REIT's are built like Ponzi schemes. They take your money then generally, take a big chunk off the top for management and commissions. Then, they pay you back your capital as a "income stream". What a joke. You cannot sell these investments once you buy them for anything close to what you put in. Typically, you have to wait 10 years or more to even have a chance at getting some of your money back. Lots of times, the failing Non-Publicly Traded REIT's are rolled up into another REIT and you had no idea that this could even happen. I have seen people who thought they were going to get an 8% dividend, suddenly find after a roll up that their dividend is cut in half. Would that make you mad? Mad enough to want your money back? Sorry, you have to wait 10 years or more to hope and I do mean hope that you might get 80% of it back.
You are probably thinking that your advisor would not do that to you. Think again. They have that Quota, remember? If your advisor is like most, the only thing he or she really knows about a Non-Publicly Traded REIT is that it pays him 8.5% commissions. They do not know all the bad stuff I just described.
Mutual funds are okay, aren't they?
Sorry to disappoint you, but after your advisor makes his cut of your 5.75% commission, then you have ongoing 12(b)-1 expenses and management fees that can be north of 1% per year. I have seen instances where registered reps have made their 5.75% commission, then months later come back to you and put you in an assets-under-management account for 1.5% a year. So, now, you have paid the 5.75%, you are paying 1% plus in fund management fees, then on top of that, you are paying your advisor 1.5% a year. So, after two years, you may have paid 8.25% or more to be with your advisor.
Is this picture getting any clearer for you? I hope so.
Unfortunately, 85% of the people walking around out there are getting advice from The Three Villains.
You can stop the madness. Here is how. We can run an analysis on your investments to show you the truth. Feel free to contact me if you are in FL, IN, KY or TX. I can prove it to you.
RJ
Tuesday, July 10, 2012
A Lick and a Promise Audit
Peregrine Financial Group, the holding firm for PFGBest is alleged to have used their customer's segregated funds which is a big no-no. It has only been nine months or so since MF Global allegedly also used their customer's segregated funds. Apparently, PFGBest had been showing more than $200,000,000 in a segregated account to regulators via allegedly fabricated bank statements. Early word is that they may had only had about $5,000,000 while claiming to have more than $200,000,000.
Do you actually mean that the regulators went in to audit this firm and accepted dubious paperwork as "proof of funds"? Are you stinking kidding me? It doesn't take a smart person to figure out that this is not an audit of any kind. An audit means that you go to the clearing firms and the banks in question and ask for audited proof of funds in those accounts that matches exactly what the futures firm is claiming. Apparently, the 70 or so futures firms that were "audited" (don't make me laugh) were given this type of audit after the MF Global fiasco. The emperor has no clothes now. Their lick and a promise audit was a joke. Who are these regulators? They need to be fired. They are incompetent.
As the great coach Vince Lombardi once said, "What the hell is going on around here?"
The regulators tried to alleviate everyone's fears after the MF Global fiasco by sending out their regulators to audit roughly 70 futures firms. If these 70 firms were audited this way by these regulators, then we have no idea whether these futures firm have properly segregated their customer's funds.
Bernie Madoff, when audited, simply gave the regulators made up statements that they accepted as authentic. Apparently, the regulators in charge of auditing these 70 futures firms did the exact same thing. They took the firms word for it. This is no audit.
Sadly, more employees are probably going to be out of work as a result of this fiasco.
Now, you will hear cries for insurance to protect customers and the need for more regulation. I promise you. We do not need any more of this kind of regulation. The entire industry has already proved without a shadow of a doubt that they only held the 70 firm audit to satisfy the cries of MF Global customers. Think about this from an ethical standpoint for a minute. These regulators are the ones in charge of protecting customers. They performed lick and a promise audits to satisfy their critics. However, they now have egg on their face. They have proved without a shadow of a doubt that they were just going through the motions. Is this ethical behavior? I for one do not think so.
Heads need to roll over this.
Be careful out there.
Do you actually mean that the regulators went in to audit this firm and accepted dubious paperwork as "proof of funds"? Are you stinking kidding me? It doesn't take a smart person to figure out that this is not an audit of any kind. An audit means that you go to the clearing firms and the banks in question and ask for audited proof of funds in those accounts that matches exactly what the futures firm is claiming. Apparently, the 70 or so futures firms that were "audited" (don't make me laugh) were given this type of audit after the MF Global fiasco. The emperor has no clothes now. Their lick and a promise audit was a joke. Who are these regulators? They need to be fired. They are incompetent.
As the great coach Vince Lombardi once said, "What the hell is going on around here?"
The regulators tried to alleviate everyone's fears after the MF Global fiasco by sending out their regulators to audit roughly 70 futures firms. If these 70 firms were audited this way by these regulators, then we have no idea whether these futures firm have properly segregated their customer's funds.
Bernie Madoff, when audited, simply gave the regulators made up statements that they accepted as authentic. Apparently, the regulators in charge of auditing these 70 futures firms did the exact same thing. They took the firms word for it. This is no audit.
Sadly, more employees are probably going to be out of work as a result of this fiasco.
Now, you will hear cries for insurance to protect customers and the need for more regulation. I promise you. We do not need any more of this kind of regulation. The entire industry has already proved without a shadow of a doubt that they only held the 70 firm audit to satisfy the cries of MF Global customers. Think about this from an ethical standpoint for a minute. These regulators are the ones in charge of protecting customers. They performed lick and a promise audits to satisfy their critics. However, they now have egg on their face. They have proved without a shadow of a doubt that they were just going through the motions. Is this ethical behavior? I for one do not think so.
Heads need to roll over this.
Be careful out there.
Thursday, June 28, 2012
States Win Interesting Powers in ACA
The highly anticipated Supreme Court decision regarding the Affordable Care Act has come down as a split decision. The individual mandate is upheld not under the Commerce Clause but as a tax. By 2016, the tax will be 2.5% of gross income. So, for a household income of $150,000, you can expect to pay $3,750 if you go without health insurance. This figure is less than the cost of today's health insurance for a family of four. However, what about a single person working in Silicon Valley? If they are young, single, and make $150,000 a year, plus do not feel the need for health insurance, then they will be required to pay a tax of $3,750. The question becomes whether this $3,750 can be levied or not, because the tax cannot be more than the cost of insurance in the zip code where this person resides. For example, if the average health insurance cost in this person's zip code is $2,400, then the tax is limited to this $2,400 amount. I have a question. Who is going to figure this out for every person in America? I presume the IRS.
The second part of the decision that was struck down was that the States risk losing 100% of their Federal funds for Medicaid. The Supreme Court held that this clause was unconstitutional and termed it was like "holding a gun to the head" of the states to comply. This brings up a very interesting predicament. What if a state says that they do not want to expand Medicaid to allow those under 133% of the poverty level to obtain Medicaid coverage? What is the potential effect of this? It would seem that it would keep the status quo as it is now. These people would continue to go to the Emergency Room for their minor illnesses and continue to clog up the system.
Also, how would "everyone" obtain health insurance coverage if these people, those under 133% of the poverty level were in a state that refused to expand Medicaid to cover them? This certainly presents an interesting dilemma.
Other factors of this Affordable Care Act are some taxes that go into effect, because of it. There is a 3.8% tax on capital gains. If the current tax rates are allowed to expire at the end of this year, then the capital gains rate will climb at the highest level to 43.4%. It is 20% today.
An interesting quote from the opinion was this one. "But the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people."
Perhaps the most telling quote in the decision is this one, however. "It is not our job to protect the people from the consequences of their political choices."
The voters voted for their elected officials and the ACA is the result of those voters decisions. Look on the bright side. Voters can choose a new direction this November.
The second part of the decision that was struck down was that the States risk losing 100% of their Federal funds for Medicaid. The Supreme Court held that this clause was unconstitutional and termed it was like "holding a gun to the head" of the states to comply. This brings up a very interesting predicament. What if a state says that they do not want to expand Medicaid to allow those under 133% of the poverty level to obtain Medicaid coverage? What is the potential effect of this? It would seem that it would keep the status quo as it is now. These people would continue to go to the Emergency Room for their minor illnesses and continue to clog up the system.
Also, how would "everyone" obtain health insurance coverage if these people, those under 133% of the poverty level were in a state that refused to expand Medicaid to cover them? This certainly presents an interesting dilemma.
Other factors of this Affordable Care Act are some taxes that go into effect, because of it. There is a 3.8% tax on capital gains. If the current tax rates are allowed to expire at the end of this year, then the capital gains rate will climb at the highest level to 43.4%. It is 20% today.
An interesting quote from the opinion was this one. "But the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people."
Perhaps the most telling quote in the decision is this one, however. "It is not our job to protect the people from the consequences of their political choices."
The voters voted for their elected officials and the ACA is the result of those voters decisions. Look on the bright side. Voters can choose a new direction this November.
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