Going Broke Safely…

The weaker than expected economic indicators here in the U.S and around the globe has investors seeking safety.

  • Many will seek the safety of cash or CDs.
  • Many will turn to insurance annuities.
  • Some will turn to gold or the next ‘hot commodity’.

This is a great example of people making an emotional decision during short term volatility.

The seal of the United States Department of Labor
The seal of the United States Department of Labor (Photo credit: Wikipedia)

The historic “Risk Free Rate” is about 4%.  The risk free rate is the historic return on government guaranteed T-bills.  Think of them as the CDs issued by Uncle Sam.  They have a very low return but virtually no volatility.  They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long term losses.  It’s the safest way to go broke.

There has been abundance of ads for annuities touting the ‘guaranteed’ return of as much as 6.5%. What they don’t tell you is that in order to receive the ‘guaranteed’ rate you need to annuitize after a 5 to 10 year holding period.

This means you give complete control of YOUR money to the insurance company in exchange for a monthly income for life. They also neglect to tell you that once annuitized the ‘guarantee’ is turned off.

You could run out of money. Because of inflation the purchasing power of your money decreases every day.

These products pay the broker/agent a 8 to 10% commission.  When you consider all the fees you pay, you will not keep up with the inflation. The insurance company and the broker wins and you lose.

The truth about these guaranteed products is becoming evident with the new fiduciary standard.

The Department of Labor will be introducing and implementing a new fiduciary standard for anyone working with consumer’s retirement accounts. As a reminder the fiduciary standard states that the adviser/broker/agent must make recommendations that are in the best interest of the client only.

The financial services industry has been fighting this standard for years. Because now they must prove their solution is in the best interest of the client. In the past it only needed to be suitable. This makes the brokerage firms, insurance companies and banks accountable for all they sell.

You need to ask why haven’t they been recommending what was in my best interest all along ?

With the new fiduciary standard the variable annuity may become obsolete as a solution for an IRA rollover. Any annuity sale could put the salesperson as well as their employer as risk.

Most annuity sales are made by using the fear of market volatility.

We need to ask when did Americans become so afraid of risk ?

We must ignore the short term volatility and be adults about our finances. We should realize there is no free lunch. Risk is risk, live with it.

We might look at downturns as an opportunity to rebalance our portfolio. Buy low and sell high, automatically.

Remember, free markets work, capitalism while not perfect, works.

To succeed, we must own equities….globally diversify….rebalance.

Small business owners are unprepared for retirement

A disciplined savings and investing strategy is much easier than most small business owners believe. By installing a retirement plan for themselves and their employees they will save in taxes and help their employees. The benefit to employees will result in increased loyalty and satisfaction.

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“The lack of retirement planning by so many people is stunning, especially since business owners have no one else to rely on when it comes to putting their retirement plans in place,” says Mary Quist-Newins, director of the State Farm Center for Women and Financial Services at The American College. “When you consider that the mean age of our respondents is just over 50 you have to wonder, ‘What are these individuals waiting for?’ Retirement will be upon them before they know it. Small businessowners need to start preparing for retirement now.”Even for the small business owners who have calculated their retirement goals, most do not have a formal plan to achieve their financial objectives. Among the small business owners surveyed, 77% of the women and 74% of the men have no written plan for retirement.

Small business owners are far too busy running their business to take the time to properly plan and execute a strategy to successfully retire. Many wait until three years or less before retirement to plan. Others believe they will sell their business to fund their retirement. This lack of planning forces many to make decisions they would not ordinarily do.

Please comment or call to discuss what it takes to begin a retirement plan.

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401(k) Plans: A Tale of Unrequited Love

The 401(k) plan has disappointed many largely because the financial industry has treated in like a cash cow rather than an employee benefit. The 401(k) plan can be very successful by treated it more like a pension fund. Allowing participants to choose their own investments without ehlp will lead to disaster. A prudent portfolio requires a strategy and discipline. Remember Wall Street makes money when people trade. They feed fear by marketing the next great product or asset class. Your portfolio is like a bar of soap the more you touch it the smaller it gets.

So, that should mean companies could score big wins in the areas of hiring and retention by giving employeesbetter-than-average retirement benefits. Right? “I don’t think so,” said Daniels. “Even though people often say retirement is important to them, they don’t attend to their accounts very well. They’re behaviorally wired that way. It’s this long-deferred event in the future. Immediate gratification seems to be the most important thing.”All of that seems on the money to me. But there are other opinions, such as that of Bill McClain, the lead 401(k) consultant at Towers Watson’s main competitor, Mercer. There is some evidence that when employees are worried about their finances, their engagement level, productivity, and loyalty to employer all decline, McClain told me. There’s also the issue of workforce management: People who can’t afford to retire cost the company money, because health-care expenses increase with age. Prudent succession planning might be affected as well.

Perhaps if there was a way to reward executives on long term results rather than this quarters financial statement retirement plans would be given their just due. A quality retirement plan can attract and retain top employees long term. This is true only is you communicate its value.

Please comment or call to discuss how this affects you and your organization..

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Why Variable Annuities Have No Place in Your 401(k) Plan

Variable annuities are another way for insurance companies to hide unnecessary fees from plan participants. Many of the features when viewed over the long term are unnecessary and hurt performance. The complexity in these annuities does nothing but confuse plan participants and are might to feed their fear. In other words they help sell more insurance.

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Annuities can make sense for a part of your portfolio especially as you reach retirement and you are looking for some stability to your income stream, but not in your 401(k).  The costs and issues in managing a 401(k) plan in your employees’ best interest far outweigh the need for providing annuities in any company’s retirement plan.

When you consider all the fees involved in any annuity the benefit to the investor is very small and in most cases will result in a smaller account balance. Annuities are sold based on the fear of the client. Agents and brokers make money on commissions and will sell whatever the client wants at the time. An real investment adviser is not merely a salesperson. Sometimes being in the correct investments is uncomfortable but is the best for the client.

Please comment or call to discuss how this affects you and your company.

  • Plan Sponsors Smile: Hooray for the 401k! (401kplanadvisors.com)
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  • DOL tells employers when they must fire advisors to 401(k) plans (401kplanadvisors.com)
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Does Your Broker Treat Your 401(k) Plan Like an Employee Benefit or a Lead Generation Tool?

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There has been much discussion on the fiduciary standard for all financial services salespeople. There has been new regulations requiring those brokers or agents selling retirement plans to become fiduciaries to the plans. This is vital to the success of the 401(k) as the sole source of retirement for most Americans.

Many retirement plans are sold today, not to improve the quality of investment vehicle offered to plan participants. But rather as a lead generation tool to sell other financial products to the participants which generate high commissions for the broker or agent. Some of the product sold is helping the participants reach their financial goals, however the plan sponsor cannot be assured that this is the case. Remember, your employees look to you for guidance and respect your decisions. These same employees will believe that you endorse everything the broker or agent proposes.

The retirement plan you provide to your employees should be treated like the important employee benefit you intended.  As a plan sponsor you have the fiduciary responsibility to act in the best interest of the plan participants and their beneficiaries. With this responsibility comes liability for you the fiduciary to the plan.

The 401(k) plan has become the sole source of retirement of most Americans. Like it or not, business owners are responsible for providing the best tools available for their employees to successfully retire. It is your responsibility to protect your employee’s future self from their current self. To do this, avoid any conflicts of interest by treating your 401(k) plan as an employee benefit not a lead generation tool.

Your company’s ability to remain competitive for talented employees and retain those employees is dependent on your ability to provide excellent employee benefits, including your 401(k) plan.

  • U.S. 401(k) Disclosure Is Coming-What To Do In January (401kplanadvisors.com)
  • The New 401(k) Advice Rule and the Road to a New Fiduciary Standard (401kplanadvisors.com)
  • Who Are Your Fiduciaries? (401kplanadvisors.com)
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The True Enemy of Every Investor.

Understanding Financial Leverage
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Successful investing is not, per se, a portfolio problem, but rather a people problem. No matter how well designed and engineered a portfolio is, it can easily be destroyed by imprudent investor behavior.


Unfortunately, the true enemy of every investor lies within.


The instincts, emotions, and even biochemical makeup of human beings drives them to gamble and speculate with their money, even when they don’t mean to. This problem is multiplied exponentially by financial institutions that profit from this self-destructive cycle. You will see that this cycle is hard wired into every human being in the world. No one is exempt.


After studying the collective behavior of thousands of real world investors over the past decade, several truths have made themselves clear. It is my belief that many, if not most financial product sponsors are aware of this dilemma,


but either don’t care that the investor is harmed by it,


or are ignorant of the damage that they unknowingly perpetrate on the American investor.


To succeed in investing you must own equities……globally diversify….rebalance.

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Siedle’s Rules for Handling Financial Adviser Conflicts of Interest

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The new fiduciary standard for all advising clients on investments will help avoid these conflicts. The question remains, why is the financial services industryso adamant about not following the fiduciary standard?

First, conflicts of interest are generally to be avoided. Why? It’s a simple matter of loyalty. You want to know that the agent you’ve hired to handle your hard-earned savings is exclusively motivated by what’s best for you and not what’s best for him or his firm. Again, conflicts result in real harm. We’re not concerned here with theoretical moral dilemmas. The concerns are improper economic incentives and divisions of loyalty that will cost you. Every financial adviser that admits to a conflict will, in the same breath, tell you that you should not be worried. Already the guy is lying to you. Don’t believe it for a minute. Conflicts are red flagsthat demand your attention. Don’t dismiss your concerns before you’ve even begun to address them.Second, conflicts of interest are to be tolerated only when they are either (1) unavoidable; or (2) the potential rewards outweigh the risks. In my professional experience, when it comes to investment products and services, rarely, if ever, are conflicts unavoidable. You can almost always find another firm with comparable pedigree and performance results that is not subject to the conflict at issue. There are tens of thousands of advisers out there and unless you’re living on a deserted island, seriously consider whether you can get the same product or service without the attendant baggage, i.e. conflict-related risk.

More likely, you may believe that the potential reward (future outperformance) outweighs the potential risk (known conflicts). That may be a valid conclusion but the question is: how did you arrive at it?

Great article. The financial services industry will need to more thoroughly train their representatives on what they sell rather than how to sell more.

Please comment or call to dicuss how this affects you and your financial future.

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How Is Your Financial Adviser Paid?

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Why should you care how your adviser is paid? Because his/her compensation can impact the choice of the products recommended to you and your return from those products. Moreover, the adviser’s compensation structure can create a conflict of interest between what is best for you the client and what is best for the adviser’s wallet.

While there are many fine financial advisers who receive all or part of their compensation from the sale of financial products, a client can never be fully sure that the adviser’s recommendations are fully made with the client’s best interests at heart. Will the adviser suggest a mutual fund that does not pay a commission even if that fund is the best one for the client?

Fee-only advisers do not have this conflict of interest because they are paid by the client, not the financial product provider. They are free to suggest the best investment vehicles and financial products for each client’s individual situation. Full disclosure: I am a fee-only adviser, and I absolutely feel this is the best compensation method for clients.

When selecting a financial adviser, be sure to understand how he or she will be paid from working with you. Compensation structure should clearly not be the only metric used when choosing an adviser. There are many questions to ask a perspective adviser. Most of all, be sure that the person that you choose to work with is competent and that he or she fully understands your situation, your goals, and your expectations from the relationship.

Conflicts of interest when dealing with a financial adviser can be minimized. Fees and risk level are two thing an investor can control. Working with a fee only adviser can help control both.

Please comment or call to discuss how this affects you and your financial future.

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The Tyranny of Compounding Fees: Are Mutual Funds Bleeding Retirement Accounts Dry?

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The investments in a 401(k) plan or any retirement plan are meant to save for the long term. The most appropriate strategy is a risk adjusted globally diversified portfolio. Evidence proves that trying to find the next active manager will hurt your returns.

Executive Summary

  • Investments in retirement accounts are plagued by poor returns. An important factor is that, in aggregate, returns of actively managed equity mutual funds trail those of broad market indices.
  • This paper partitions the real total return of the S&P 500 into: (1) return to mutual fund investors and (2) return to the financial services industry. The author calculates these shares for all 10-, 20-, 30-, 40-, and 50-year investment periods using data from January 1871 to June 2011.
  • The financial services industry share of market returns increases with the length of investment period. For annual performance lags of 250 basis points (bps), the industry share over 10 years is about 46 percent on average; over 50 years it increases to 74 percent.
  • Smaller degrees of underperformance increase investor shares substantially: 50-bp lags result in an average investor share of 90 percent for 10-year investment periods and 77 percent after 50 years.
  • The shares of market returns to investors and the financial services industry are highly variable for shorter investment periods, but this variability declines as the investment period increases.
  • A 100-bp annual lag in performance over 50 years would reduce retirement assets currently held in equities by about $28 trillion (inflation adjusted), an amount almost twice that of the entire U.S. national debt as it currently stands, assuming average market returns.
  • The author recommends that pension plan fiduciaries be required to select default investments with a management expense ratio (MER) as low as possible, ideally no greater than 10 bps. Also, financial advisers should direct client funds to similarly low-cost investment vehicles.

Stewart Neufeld, Ph.D., is an assistant professor at the Institute of Gerontology at Wayne State University in Detroit, Michigan

This article illustrates how Wall Street makes most if not all of their income. It is not through savvy investing but rather by actively traded mutual funds.

Please comment or call to discuss how this affects you and your investment goals.

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89% of 401(k) Investors Want Allocation Help

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The other 11% do not want to admit that a professionally managed portfolio is really what they want. Many believe they can substitute stock trading for a disciplined savings strategy. This strategy is ok for spare funds but is imprudent for a retirement plan.

Eighty-nine percent of the 2,600 401(k) investors surveyed would like help with asset allocation, 84% want solutions for calculating and creating retirement income, and 79% would like an annual financialcheckup to set and measure their progress. Less than half, 48%, feel that they are in consult of their retirement plan investments.“Most Americans are busy with their jobs, their families and their personal pursuits, and say that they don’t have the time or interest to become experts in retirement planning,” said Lynne Ford, CEO of ING Individual Retirement. “The results from our study were clear: Americans want a roadmap to help them navigate to and through retirement.”

Ford added: “As a whole, consumers highly value choice, yet too much can be overwhelming. Consumers also value the control to make their own retirement-planning decisions but want detailed instructions on how to accomplish their financial objectives.”

There is a clear advantage to offering a negative election to professionally managed accounts rather than a positive election.

Please comment or call to discuss how this would affect you and your employees.

  • Six steps to the perfect 401(k) (401kplanadvisors.com)
  • Company Sponsored Retirement Plans: Mistakes to Avoid & Solutions for Success (401kplanadvisors.com)
  • You Pay More for Your 401(k) (401kplanadvisors.com)
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