Lessons You Can Learn From This Wealthy Investor

Brokers and agents are trained to feed your fear. This typically results in inappropriate products designed to enrich the brokers and agents and not you.

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Mistake No. 1: The DeBerrys no doubt felt that brokers had an expertise that would assist them in growing their fortune. They would have been better advised to seek the services of a Registered Investment Advisor who focused on their asset allocation and recommended only a portfolio of low management fee stock and bond index funds in a suitable asset allocation.It is easy to learn from this mistake. Don’t deal with brokers.

His broker at Morgan Keegan invested his funds in four, proprietary bond funds, including its Select High Income Fund, C shares, its High Income Fund, its Strategic Income Fund, its Multi-Sector High Income fund and its Advantage Income Fund.

Mistake No. 2: Never purchase proprietary funds. They are aggressively sold by brokers because they often have a financial incentive to do so. The brokerage firm wants to keep the management fees. Proprietary funds frequently underperform their Morningstar assigned indexes. I recently did an analysis of the performance of the proprietary funds of three of the largest and best-known banks. The majority of them failed to achieve the returns of their benchmark index over a 15-year period.

Mistake No. 3: The DeBerrys were attempting to use bond funds to increase their returns. There is a common misconception about bonds. Investors believe they are “safe.” When you seek higher yields from bond funds, you are taking additional risk. The bonds may be lower rated, increasing the risk of default. The maturity date may be long-term, giving you the risk caused by fluctuating interest rates. There is no free lunch. You would be better advised to take risk by adjusting the amount of your portfolio you allocate to stocks, and limiting your bond holdings to short term (less than a five-year duration), very high quality, bond index funds, which will act to smooth out the short term volatility of your stock holdings. Vanguard’s Total Bond Market Index Fund (VBMFX) would be a good choice for the bond portion of your portfolio.

The DeBerrys invested $8 million in these funds. According to their Statement of Claim (from which all facts in this blog were derived), they lost more than $7,550,000.

In a Consent Order dated June 22, 2011, the SEC and the Financial Industry Regulatory Authority announced that Morgan Keegan and Morgan Keegan Asset Management had agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. They were accused of causing false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset Management from January 2007 to July, 2007. The SEC’s order found that Morgan Keegan “failed to employ reasonable pricing procedures and consequently did not calculate accurate ‘net asset values’ for the funds. Morgan Keegan nevertheless published the inaccurate daily NAVs and sold shares to investors based on the inflated prices.”

Two Morgan Keegan employees agreed to pay penalties for their alleged misconduct, including one who was barred for life from the securities industry.

The DeBerrys held four of the five funds that were the subject of the SEC and FINRA proceedings.

The DeBerrys filed an arbitration claim with FINRA seeking to recover their losses. Because they had an account with a FINRA member, they were required to resolve all disputes in an arbitration administered by FINRA. In light of the SEC and FINRA orders, you would think this arbitration would be a slam dunk.

Working with a broker, non-fiduciary, you are taking more risks than you may realize. Seek the advice of a fiduciary adviser, someone who will state in writing that your interests come first.

Please comment or call to discuss what a fiduciary adviser means to you.

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Indexed Annuities – Da Coach Likes Them Should You?

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The Equity Index Annuity EIA may sound like a great way to deal with market volatility but beware. In the long run this product will cost you big. When you control one risk you may add another. Inflation risk is perhaps your worst enemy going forward. Financial institutions will promote products that deal with consumer fear rather than advising investors on what is right for them. Finally the additional fees and the foregone dividends will cost you returns in the long term.

Should you pick up the phone and say that Coach sent you?  Let’s examine a few issues.What is an Indexed Annuity? Per the FINRA website, EIAs (Equity Indexed Annuities) are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

Reuters recently ran a piece on these products. A few points raised in the article:

— Hidden fees and commissions. Commissions typically run between 5 percent and 10 percent of the contract amount, but can sometimes be more. These and other expenses are taken out of returns, so it’s hard for buyers to determine exactly how much they’re paying.  

— Complex formulas and changing terms. The formulas used to determine how much annuity owners earn are so complex that even sales people have a hard time understanding them, and they can change during the life of the contract.

— Limited access to funds. Buyers who try to cash out early will incur a surrender charge that typically starts at 10 percent and decreases gradually each year until it stops after a decade or more.

–Limited upside. An annuity’s “participation rate” specifies how much of the increase in the index is counted for index-linked interest. For example, if the change in the index is 8 percent, an annuity with a 70 percent participation rate could earn 5.6 percent. However, many annuities place upside caps on the index-linked interest, which limits returns in strong bull markets. If the market rose 15 percent, for example, an annuity with a cap rate of 6 percent would only be credited with that amount.

If it sounds too good to be true it probably isn’t. In addition to the following tips the EIA does not pay you the dividends earned by the index. These funds go to the insurance company.

Please comment or call to discuss.

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Why Leave Money on the Table—Make the Most of Your Employer’s 401(k) Match

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Plan participants will begin to realize that the federal governement may not be able to support them in the retirement years. Sacrifices will be required to adequately prepare for retirement. It may include cutting expenses and / or increasing income.

According to a recent report,1 29.4 percent of 401(k) participants do not contribute enough to their 401(k) to receive their full employer match—with higher rates of foregone matches seen among younger workers age 20 to 29 (43 percent) and those automatically enrolled into an employer-sponsored defined contribution plan (41 percent). An earlier report showed that 40 percent of employees making less than $40,000 fall short of contributing the full extent of their employer’s match.2Millions of workers are leaving money—free money—on the table. 

FINRA is issuing this alert to educate investors about the substantial boost to their retirement savings that can come from taking full advantage of an employer’s matching contribution. As more and more companies reinstate matches that were cut or eliminated during the economic downturn, workers whose companies offer a match should make the most of it.


The Value of a Corporate Match


A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement—and an employer match can add a substantial amount to an employee’s nest egg. Let’s assume you are 30 years old, make $40,000 and contribute 3 percent of your salary ($1,200) to your 401(k). And, for the sake of this example, let’s also assume you continue to make the same salary and same contribution each year until you are 65. After 35 years, you will have contributed $42,000 to your 401(k).


Now let’s assume you get a match from your employer. One of the most common matches is a dollar-for-dollar match up to 3 percent of the employee’s salary. Taking full advantage of the match literally doubles your savings, even assuming no increase in the value of your investments: Instead of having set aside $42,000 by the time you retire, you will have set aside $84,000.


If you receive a 3 % match from your employer it is like receiving an extra 60 hours of pay per year. That’s a week and a half of extra pay per year tax deferred.

Please comment or call to discuss.

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