Nov 15, 2010

New York Times Lets You Fix the U.S. Budget

Fixing the US budget is similar to fixing your finances at home. Find the areas where you are spending the most money and cut back. Stop making interest payments by paying down debt. SPEND LESS THAN YOU MAKE!!! About 75% of the US budget consists of defense and entitlements like Social Security, Unemployment, Medicaid and Medicare. These programs provide assistance to millions and conversations about making changes to these programs bring up quite a bit debate. Folks on Capitol Hill can reduce benefits and programs or they can raise taxes. Until these hard conversations take place, the budget will remain in sorry shape.

The New York Times had a really interesting tool. Now is your chance to fix the budget. It took me about two minutes. See what you think: Fix The Budget: New York Times

Oct 26, 2010

Recession: The Era of Opportunity

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My grandfather told some wild tales! Like any other grandfather, he walked uphill to school both ways, barefoot and in the snow. He also had some stories about growing up during the depression. His family was broke, along with most of the rest of America. Back then, it wasn’t the kind of broke where unemployment benefits and Social Security provided assistance during hard times. The federal government adopted these programs in 1935 with the Social Security Act. Nope, my grandpa and his family were just broke.

Well, he was unwilling to sit around; he got out and got to work. Sometimes his rowdy schemes got him in trouble but other times they paid off.

Once he saw a government request in the paper asking for bids to install signage along hundreds of miles of the new highway system. Quite a few crews applied with teams of men ready to go to work. Well, grandpa put a bid in on the project as well and he got the job. He moved my grandmother and the kids to a new state and began work on this tremendous task. My mother remembers moving from state to state growing up and has similar stories of my grandfather seeking opportunities all over the west.

Once again our economy has hit hard times and for many, earnings are in the tank. In the midst of this difficult time, there are opportunities. Now is the time to look for those opportunities and to make big decisions. Here are a few ways to take advantage of a lean year.

Lousy Economy & Low Rates. High levels of income mean high taxes, but if your income is at 0 you get to start at the 10% marginal tax rate and move up through the low rates. Consider this as an opportunity to take some income and give substantially less to Uncle Sam than in normal years.

Convert your IRA to a Roth. When you convert a portion of your IRA to a Roth IRA, you pay ordinary income tax. In a normal year with good income you are already starting at a high tax rate, but in lean years that conversion is taxed starting at that low rate.

Lock in Capital Gains. For folks in the 10% and 15% brackets, capturing long term capital gains are “on the house” this year. As part of EGTRRA (Economic Growth Tax Relief Reconciliation Act) folks in these brackets pay 0% on long term gains. Even for folks in higher tax brackets, unless congress extends tax cuts, we won’t see higher tax rates until next year. 2010 may be your last opportunity to take advantage of the Bush Tax Cuts.

Because the Wash Sales Rule does not apply to gains, these securities can be sold at a gain and re-purchased right away.

Locking in Losses While the Market is Down. If you still have losses in taxable accounts hanging around from one of the bursting bubbles, perhaps you should sell that asset and capture the loss. You can carry losses forward to offset future gains and with capital gains rates expected to rise, that means more savings later on. Assets sold at a loss are subject to the Wash Sales Rule and you will have to wait 30 days to re-purchase these assets or purchase different assets.

Converting IRA assets to a Roth makes more sense while the market is down as well. If you had a portfolio that saw losses of 20% you would save about that much in tax. Taxes on an $80,000 Roth Conversion are less than the tax you would have paid converting a $100,000 account.

Carry-Forwards. We touched on carry-forward losses and offsetting gains, but some folks end up with other types of carry-forwards. For folks who are charitable, gifts to non-profits are limited to 30% or 50% of adjusted gross income. If gifts in a year exceed those amounts, depending on the type of charity, you end up with a charitable carry-forward deduction. Unlike the carry-forward loss which stays with you in perpetuity until you use it, the carry-forward charitable deduction goes away. Usually after 5 years, if you don’t use it you lose it!

If you are in a place where you have a charitable carry-forward deduction, perhaps you can save money on a Roth Conversion, or accelerate income in order to use the deduction. Landowners who have made donations of a conservation easement can also benefit from this type of planning.

Speed up the savings. If you own a business, you can deduct the purchase price of qualifying equipment, usually over the course of its lifetime. With the Section 179 deduction you can deduct the full purchase price of the equipment from your gross income. In the past you could deduct up to $250,000 but Washington recently signed into effect, HR 5297, which allows you to deduct twice that amount, $500,000, in the first year. For business, this is a great deduction and with bargains on equipment, now is the time.

Don’t Stop Believin’. Most folks have not seen a recession like this in their lives. Prices are low, interest rates are low. Prices on businesses, equipment and real estate are finally reasonable. We won’t know the bottom until it is too late, but there is certainly more opportunity in a market like this than there was a few years ago. Seek out those opportunities and work with the professionals you trust to take advantage of them. Gather your CPA, your attorney and your financial planner together to find ways to save money and to take advantage of lean years.

Sep 22, 2010

"Chance Favors the Connected Mind"

Stephen Johnson discusses where good ideas come from. He suggests that working together and being connected allows folks to be more innovative. According to Stephen, an idea isn't a lightbulb moment or a eureka moment, but is a network. Managing your finances effectively and saving taxes can't happen in an instant either. It takes connections and professionals who are willing to consult with one another to come up with the very best ideas to simplify your finances and save you money. At lunch with a local estate planning attorney today we talked about the fact that many of the most effective tools available to estate planners in years past have been eliminated by recent legislation. Philanthropic planning will be a growing area of interest for many clients.

As congress works through a massive agenda at the end of this year, Americans will wait to hear how new legislation will affect them. The expiration of Bush's tax cuts, the estate tax and step up in basis, new costs of healthcare... There are plenty of uncertainties. Now is the time to engage and to connect with a network of folks who can work together to maximize your finances.

Jul 9, 2010

The Negative Effects of Caffeine

Caffeine, the lifeblood of our nation. Many American's "can't" start their day without that cup of Joe. I can understand it, I am hooked. The problem is, I am a coffee snob and I would quit coffee cold turkey rather than drink Chock full o' Nuts or a cup of coffee from a gas station. I like Starbucks just fine, but the price tag is just too high for me to frequent. Here is some math.

If you go to Starbucks every work day and order a tall Mocha Frappuccino or any other specialty drink, it will set you back over $4.00. That's $20 per week, not including the price of the baked goods that go with your drink. Over the course of 52 weeks that ads up to $1,040 per year without interest. If you invested that money and earned 6%, and if you did it consistently for 30 years, you would end up with somewhere in the neighborhood of $85,000.

Well, coffee isn't my only bad habit. I eat out; as a growing family, we would be lucky to spend less than $30 per week on restaurants. I grab an occasional ice tea or soda in the afternoon, that's another $3 per week. We rent a few movies which ads up to roughly $8. Tack on the bagel from my once a week men's group; $5. All of this stuff ads up. Just between these things and the coffee we have about $63 per week. If you run the same math on investing that over 30 years you’re looking at more than a quarter of a million dollars.

This is real money.

For me these things are important. Call it comfort food or whatever you want. They say that, "The quickest way to a man's heart is through his stomach" and I believe it. So instead of giving up these indulgences all together, I try to be smarter about it. I found a grocery store locally who brews pretty good coffee. They will sell you a refill for 50 cents and any pastry or muffin for 55 cents. For $1.11 with tax I get my coffee and a donut. (I'll probably pay for it in cholesterol later.) When compared to the Starbucks situation, that saves me $2.89 per day. If you invested the $2.89 for 30 years at 6% you would end up with $62,000. Not quite $85,000 if you skipped out completely, but you still get your treat and you don't break the bank.

These opportunities exist everywhere. The spot we rent movies has a policy that if you return them the next day you get a $2.00 credit. We make sure we get those flicks back and if we keep them we try to pass them along to our friends. When eating out, maybe skip the combo meal for $7.00 and go for 3 items off of the dollar menu and an ice water. Grow your own veggies instead of spending $2.38 on an organic tomato. Communicate with friends and family about how they save money. It all ads up.

In the end, you will still be able to afford that cup of coffee in retirement as well.

Jun 30, 2010

Grandpa Always Said...

Commentary from the 2010 Morningstar Investment Conference
“We are on the brink of losing a generation of young investors who don’t understand this volatility.” Bill McNabb, the CEO of Vanguard, addressed an audience of nearly 1500 financial advisors at the Morningstar Investment Conference in Chicago last week. I thought his comment was a bit of an understatement as both young and seasoned investors alike have been understandably concerned with the past few years of market volatility.

We hear these concerns every week from folks in all walks of life. We have witnessed solid AAA rated firms promising healthy financials on Friday and collapsing on Monday morning; we have seen a “Flash Crash” in the market and we have watched as institutional investors paid the government for safety while treasuries had a negative yield. These events are anything but normal. The loose promises of stock brokers suggesting an easy 8% + on investments are gone. Investors have lost trust in the markets.

According to Morningstar, $356 BILLION flowed into bond funds in 2009 and the trend hasn’t stopped in 2010. Year to date nearly $120 billion more has moved into bond funds. Folks are concerned! They are worried about losing any more principal, about losing another decade, they are concerned about a bond bubble. The government debt here and abroad is top of mind, and inflation, now on the back burner, may boil over soon.

What can we do? As top minds gathered in the “Windy City,” I had a chance to engage in discussions on strategies to help us protect clients’ assets and look ahead to opportunities. Many fund managers were available for questions. Morningstar analysts were also at the conference sharing their opinions and asking pointed questions of portfolio managers.

Spending and deficits will haunt us if we don’t prepare.

Pat Dorsey, director of equity research at Morningstar, opened the conference with discussion on the economy and debt and deficits. This theme persisted throughout the conference. Dorsey pointed out that the U.S. financial system was stretched before the crisis and without some sort of intervention our country is in for some major trouble. Spending on defense and entitlements including Social Security, unemployment, Medicare and Medicaid make up 75% of our budget and until law makers begin addressing these issues seriously things will not improve.

Rudolph-Riad Younes, a fund manager for Artio Global investors, joked of prior bubbles in a later session that, “we had dot-com, we had dot-home and now we have dot-gov.” He suggests that the economy is so hyped up on drugs from unprecedented global stimulus and from the bursting mortgage bubble that it is extremely difficult to tell what the global economy is really doing. “Tylenol will cure an infant’s fever for a minute,” he says, suggesting that the stimulus has helped to cover up problems, “but homeowners going through foreclosure are vacationing in Hawaii.” This spending makes no sense and analyzing markets in this environment can be difficult.

Across the globe, spending on all levels is rampant. Many federal governments are in debt, municipalities in many cases are up to their ears, state pensions and the Social Security program are over their head, and many individuals are under water. No matter who was speaking, this theme was echoed throughout the conference.

Michael Hasenstab, the manager of Templeton Global Bond, further addressed these concerns. “There are many countries around the globe with very little debt.” He is looking around the globe for countries who have managed their finances better than we have. Because of his global perspective, the fund is able to hedge against the poor financial situation in the U.S. by investing in foreign debt using the U.S. Dollar or other currencies.

As a country we have a few more resources to deal with debt than Greece did. When faced with massive deficits a country can grow and increase GDP, they can lower interest rates, default, accept a bailout, (termed Government Transfer payment, much like in Greece) they can print more money, cut spending, or raise taxes. Of those options many are not possible. GDP growth will not fix our problem, interest rates cannot go below 0 and no one country could afford to bailout the U.S.

Our options are limited. The U.S. has already begun printing money. Generally this leads to inflation, but Pat Dorsey from Morningstar pointed out that increased regulation for banks has required more deposits. He suggests that “the Fed hasn’t printed money but it has created deposits.” This, along with a continued slump in demand, has offset deflation somewhat, but it is coming.

After November we may see the government begin to cut spending, but as Dorsey and many others at the conference mentioned, until they work on substantially cutting defense and entitlements, cutbacks will make little impact.

What’s left? You’ve got it, taxes are increasing. We have been harping on this for months. Bush’s tax cuts will expire at the end of this year and that is only the beginning. There are already talks of a 1₵ per trade tax on the markets, capital gains will increase, health care reform will eat away at marginal income. Now is the time to plan for higher taxes.

Municipal bonds will help many investors to reduce taxes, and at the conference they were generally smiled upon by analysts. Christine McConnell, a portfolio manager for Fidelity, stated that “duration risk is at a maximum. It begs the question is credit risk a better bet?” Analyzing the credit risk of municipal bonds can be challenging, but rewarding. Some bonds are rated AAA and deserve a much lower rating, while others are rated very poorly and can be bought at a discount but have good cash flow or consistent revenues.

Stocks that yield dividends were a key focus as well. Healthy solid companies didn’t tend to rally like the troubled companies in 2009. Many of the portfolio managers are looking to mega-cap consumer-staples companies to provide consistent income. Hersh Cohen, a portfolio manager for a dividend strategy fund, mentioned that it has been literally 60 years “since you could get more up front return on good solid companies than on bonds.” This was a recurring theme at the conference as well.

This gave some support to our recommendations for companies who pay steady, consistent, rising dividends last year. The investments did not see gains like we expected in 2009 but have been plugging away paying investors each month. I was glad to hear that we were not alone in this thinking and appreciated the reassurance.

Inflation is coming, but when?

Pat Dorsey, when asked about gold said, “all I know is that it is shiny.” The metal has been looked at in the past as a hedge against a weak dollar and inflation, but Dorsey suggests that with the emergence of ETFs that track the price of Gold, the yellow currency may be over inflated because of the ease of entry.

Dorsey also had this to say in regards to when inflation will occur, “We have never been here before and we just don’t know if we will see inflation or deflation short term.” When advisors were asked if they expected inflation in the next 12 months, none of them raised their hands, but when they were asked if inflation would be an issue in the next 20 years they all agreed that it is unavoidable.

Because inflation is looming, but not expected right away, inflation protection is relatively cheap. The challenge will be to take advantage of the price without being negatively impacted by deflation or rising interest rates.

There is a bond bubble, but it may not pop quite how we expect.

Curtis Arledge is Blackrock’s Chief Investment Officer of fixed income. “The bubble is real,” he said, “but it is made up of very safe and short term investments.” Earlier I mentioned that nearly one half of a trillion dollars has flowed into bond funds in the past 18 months. Curtis and a few other bond fund panelists agreed that the majority of this money has moved into ultra-safe investments, thus setting this bubble apart from the dot-com bubble and the housing bubble.

Curtis re-emphasized the bond panelists concerns, “consumers are missing an opportunity to lend while demand for credit is high and banks are not lending.”

This money will flow out of bond funds eventually, but investors will miss out on opportunities while they wait. We have been trying to put money to work in accounts, looking to alternative strategies and de-valued bond funds. We have never been in a place where interest rates were so low for so long and government spending so high. We are working to find opportunities for conservative allocations but are concerned about principle preservation as well.

The next decade in your portfolio does not have to resemble the last.

The last ten years has been labeled by investors as, “The Lost Decade.” Rob Arnott, a fund manager for PIMCO All Asset suggests that, “the past decade was only a lost decade to investors who were 100% in equity and weighted by market capitalization.” In plain English, if you were invested in the S&P 500 you would be flat for the decade. The S&P 500 is market weighted. This means that if you own the index, the majority of your holdings are focused on the largest and MOST EXPENSIVE companies. In the same way, if you owned a bond index you probably owned the MOST INDEBTED countries and companies.

Well, grandpa always said to buy low and sell high. Arnott suggests that folks who did not blindly purchase indexes should have performed better over the same time period. Arnott says to, “Use your risk dial. If I am not getting paid to take risk, I don’t want to take risk.”

For a decade that saw the emergence of the ETF, this flies in the face of many new beliefs. We believe Arnott has a strong point. Although we have done our due diligence for investors regarding passive investing and ETFs, it seems that so far, good managers who understand risk have been able to add value throughout a lost decade.

This was a good trip and a great chance to sit with many of the managers that we work with. Our goal is to make sure that they are adding value, picking good holdings and avoiding bad ones. These managers cannot see into the future, they don’t know where the markets are headed exactly, but overall they are looking for themes, just like we are. We are always happy to entertain questions or have discussions on these topics.

Jun 24, 2010

Frustrations With Toll Roads & Tickets Create Thoughts on Frugality and Fixed Income

I am here in the Windy City (Chicago) for a conference on investment analysis with Morningstar and a chance to meet up with clients. My travels took me 3.5 hours west for lunch and 3.5 hours north for dinner. Toll roads and tickets.  The road was littered with toll booths. Most of the stops only required 60 or 80 cents (not enough to buy a cup of gas station coffee) but the money really adds up. Cruise control on my rental car saved my lead foot from accruing any tickets, but the state of Illinois is certainly raising revenue through traffic violations as well. 

My travels across the state took about 18 hours yesterday, giving me plenty of time in the car to engage in lively conversation with myself. I began to relate the revenue raised by the state of Illinois with fixed income. Roads with a toll booth create revenue and are considered income producing assets (i.e. fixed income). Roads without toll booths promote commerce but they do not generate revenue and act as a liability.  

Some very popular assets generate NO REVENUE such as tracts of land and gold. These assets may appreciate, but in the interim they sit and collect dust. When sold, they aren't taxed efficiently either. Other assets, bonds, rental real estate, dividend paying stocks, etc, change in value. The cost of these assets go up and down, but they are also creating revenue, paying coupons and producing income. In some cases such as Master Limited Partnership, rental real estate or a business, they may also help with taxes. 

What are your assets doing? Are they collecting dust as they appreciate or depreciate, or are they creating income for you? There are certainly places in life for assets that don't pay income. Your home is one of them and gold in a safe may not be a bad idea, but the majority of an investor's assets should be achieving something. 

I'm on the road again…the tolls that weren't enough to pay for coffee have added up. Most of the cash in my wallet disappeared into the abyss as I threw 60 cents into this booth and 80 into that. Each car that passes gets the state of Illinois that much closer to staying in the black. 

The same is true with our choices we make every dayEach cup of coffee that you purchase seems like a little treat, meaningless in the grand scheme of things, but just like the toll booths that money adds up and each cup of Joe is a step further from financial freedom. We also need to seek out ways to generate consistent and reliable income from our investments, similar to the stream of revenue from these toll booths. As a country and as families, the only way we will find financial freedom is to tighten our belts to save morespend less, and choose our assets wisely. 

Well, the conference is about to begin and I am here to find companies who are doing just that; managing their finances well. I'll make sure to follow up next week with an article on what some of the best investment analysts in the country had to say. 

Missing Colorado and the free roads, 


Apr 22, 2010

In Celebration of Earth Day: You can change the world, one decision at a time.

"The Marshmallow Problem" An Exercise In Planning

Tom Wujec talks about a simple exercise called "The Marshmallow Problem". He discusses how poor approaches to planning lead to poor results. We see the same thing happening far too often in finances. Investors and even their investment professionals get far to excited about creating the exact right plan that they do not allow themselves to be dynamic enough to deal with the unexpected.

The best results to "The Marshmallow Problem" came from kindergarteners because they were willing to try over and over and to attempt new things without jockeying for position or rank; nobody fought to be the CEO.

We see the best of the best ideas come out for clients when they gather their trusted advisors together to consult with them frequently. As accountants, attorneys, financial planners and other trusted advisors meet on a regular basis to re-address a client's finances and adjust according to current needs, the client comes out ahead.

Mar 30, 2010

Philanthropic Planning and the Roth Conversion: A symbiotic relationship.

Hummingbirds interact perfectly with flowers that are long and tubular. The hummingbirds have special beaks and quite a pair of wings that allow them to get to the nectar in these flowers. Their special design reduces the competition for the birds in this part of the flower market. The flowers are better off as well because hummingbirds tend to stick with similar flowers, thus pollination is more efficient between these types of flowers.

It is easy to get caught up watching these birds in action. The symbiotic relationship they share is quite amazing. The unique and specialized design of a group of creatures allows them to compliment each other and the ecosystem benefits.

It may come as a shock, but there is a sort of symbiotic relationship at work between folks that are philanthropic and the IRS. Hard to believe, I know. We understand that the IRS gives tax breaks for charitable givers because they enhance society. In special circumstances, charitable families can find tax breaks that many others will not reach, similar to the nectar only available to the unique and capable hummingbirds.

The Philanthropist and the 2010 Roth Conversion. At the beginning of 2010, the $100,000 MAGI (Modified Adjusted Gross Income) limit on Roth IRA conversions was lifted. Individuals that were not able to convert an IRA to a Roth in previous years may now be eligible, and the subject is getting quite a bit of news.

When a standard IRA is converted, it creates a tax liability. For most investors this liability is paid from outside of the IRA. This taxable income is added to their income for the year and the total is reduced by deductions.

For someone who is charitable, the deductions from giving to tax exempt organizations helps to offset income each year. In the same way, the income from a Roth conversion can be offset by charitable giving outside of the IRA. Instead of writing a huge check to the IRS to pay the tax liability, you may be able to offset a large portion of that tax by making a contribution to the organizations in your community that you support.

A unique opportunity: Charitable Carryforward. Many philanthropic families support numerous organizations in their communities and give enough that they cannot use the full tax benefit of their gifts in that year. Due to the fact that charitable deductions are limited to 30-50% of AGI (Adjusted Gross Income), they end up with charitable deductions that they must carry forward. This carryforward typically expires after 5 years if it is not used; this lost opportunity for charitable families costs them taxes.

This situation may create an opportunity to convert a standard IRA to a Roth IRA without a tax liability by using the charitable carryforward deductions. These deductions can offset the tax on a Roth conversion. There are other types of carryforwards, excess deductions and tax credits that can help to offset the tax liability incurred through a Roth Conversion as well.

Families that are interested in engaging in planned giving through the use of a Donor Advised Fund, a charitable trust, and other giving options that allow you to take a deduction up front may also benefit. This type of charitable giving, when planned along side of a Roth Conversion, may allow families to make the most of their charitable giving. For folks that have considered the development of a charitable gift plan, this is a wonderful year to begin the planning process.

As tax laws change and taxes rise, opportunities to create these symbiotic relationships will be crucial to preserving your wealth and maximizing your giving. Don’t miss your chance to take advantage of this unique opportunity. Consult with the professionals that you trust including your CPA, attorney and financial planner in order to make the most of the Roth Conversion and your charitable giving.

Mar 25, 2010

Washington on the Fiduciary Standard: Consumers first, but not just yet.

Insurance companies and big brokerages wave their wallets in Washington and throw consumers under the bus! The “Restoring American Financial Stability Act of 2010” was passed on Monday by the Senate Committee on Banking, Housing, and Urban Affairs. The legislation left out a key detail. It allows financial salespeople to continue to put their own self interest and the good of their company above their clients.

Prior to the financial mess in 2008, the members of the Financial Planning Coalition began calling for a Fiduciary Standard for investment advisors and financial planners. This was met by major opposition from firms whose employees are commission based financial salesmen. The fiduciary standard would require these folks to act in the best interest of their clients at all times. Imagine that! Consumers deserve this basic protection.

Fiduciaries live up to a few simple standards:
  1. A client’s best interest is their first priority… By Federal Law.
  2. They seek the best investments and the best prices for their clients. When comparing equal investments, the one with the lowest fee is best for the client.
  3. Fiduciaries understand that they cannot control the market; instead they focus on providing impartial and unbiased consultative advice.
  4. Full disclosure of the fees they charge and the payments they accept. Consumers understand how their fiduciary advisor is paid. No hidden fees.
  5. Full disclosure of conflicts of interest. Consumers are fully aware of relationships that may benefit the advisor.
Although the terms of this legislation have been finalized, consumers can educate themselves on the fiduciary standard. The terms, “Fiduciary Financial Planner” & “Fiduciary Investment Advisor” should not be an oxy-moron. Professionals should always do what is in their client’s best interest…ALWAYS!

Mar 9, 2010

Poking Fun

I could not resist sharing this commercial from Scottrade. They are pushing their $7 trades and in the process, picking on Brokers (read financial salesman). I love the part in the very beginning where he stumbles over the client name, which is Doug. Later he looks through his crystal ball and says, "Our focus is on you Dan."

Scottrade is poking fun at the stereotype broker that most investors have gotten far too accustomed to. There are investors that enjoy reading the Wall Street Journal and keeping up with stocks and bonds. They are passionate about making sure their finances are in order. For these types of folks, Scottrade may offer some real benefits. There are other individuals that want a financial planner who will act as a Fiduciary and will offer a consultative approach, working with other trusted advisors to maximize their finances. To find a Certified Financial Planner (TM), visit

I will leave you with one more funny commercial:

Feb 19, 2010

Dance With the One That Brung Ya'

The steps to a client-centered financial industry.
I am not going to lie to you. I was, and still am, a horrible dancer. In high school I would take a date to dances, but then I would awkwardly stand there as folks danced around me. Some girls would be kind and stick around as I made poor attempts. Others would head over to the group of guys that could really move. My first dance with my wife was not until our wedding dinner, safely after we had tied the knot.

I can’t recall where I heard the phrase, “Dance with the one that brung ya,” but it stuck with me; especially as those kind ladies put up with my lack of rhythm. I am reminded of the phrase once more as the financial industry and its consumers wait for the effects of new regulations.

For years Registered Investment Advisors who act as fiduciaries for their clients have been spreading the news that they are legally obligated to do what is in the best interest of their clients. Groups such as FPA (Financial Planning Association) and NAPFA (National Association of Personal Financial Planners) have been working to communicate the need for a fiduciary standard on Capitol Hill. Their efforts may be paying off. Congress is working toward a fiduciary standard for investment advice that would apply to both Registered Investment Advisors and Broker Dealers.

The fiduciary standard is an important step towards an industry that is client-focused, but it is not the last step. Instead, brokers who have been in a sales oriented industry for years will need to reconnect with the needs of their clients. They will need to listen to the age old advice, “Dance with the one that brung ya.”

Putting on the fiduciary hat will not change the way that business is done at wire-houses and brokerage firms. Commission based brokers will have to lose their sales mentality and they will have to begin meeting the needs of clients.

A 2005 study found that clients’ primary financial concern was losing their wealth. Their secondary desire was to mitigate taxes. Clients were calling for a consultative approach, where a financial planner would work hand in hand with other trusted advisors to ensure that the clients’ entire financial landscape was being tended to.

For years, the brokerage business has been focused on sales instead of focusing on servicing client’s comprehensive financial needs.

I enjoyed the 2006 Will Smith film, The Pursuit of Happyness. In the movie, Chris Gardner, the character played by Smith, struggles in his pursuit of a career as a stock broker. I had the joy of hearing Chris Gardner speak a few years back. He held up his hands and showed us a crook in the little finger on his right hand. He attributed this to the endless calls he had to make on a rotary telephone, dialing for dollars.

In contrast, a Registered Investment Advisor acting as a financial planner spends the day in a much different way. A meeting with a client and her accountant to discuss tax planning for next year. Lunch with an attorney to discuss the best interest of a mutual client regarding the client’s charitable trust. Phone calls to current clients to ask what needs have not been met. A fee-only financial planner’s job is to coordinate all of the financial efforts of their client. The financial planner is not paid by commissions on a sale; a planner is retained by clients who pay a fee in exchange for beneficial, consultative advice.

“You will get all you want in life if you help enough people get what they want.”
Zig Ziglar

This quote is certainly true in the financial industry. This is the reason that financial planners don’t have to follow the broker route of “dialing for dollars.” If folks in the industry would truly offer consultative financial advice, people would notice. Clients would be impressed and they would tell their friends and neighbors the good news. CPAs and legal professionals would notice and they would refer their clients.

I look forward to the baby steps that the financial industry is taking toward a fiduciary standard. But I wait with anticipation for the day that the financial industry loses its sales focus and all advisors are inclined to “Dance with the one that brung ya.”

Feb 11, 2010

Fishing for Irony

Today I had the privilege of hearing from one of the leading manufacturers of some pretty fancy fishing equipment. The presentation was fascinating and spoke to some of the huge changes in our economy. In passing the presenter made the comment,

“With the economy the way it is, fewer folks are fishing and more folks are worried about putting food on the table.”

The comment stuck in my head. It is interesting that an activity that was invented purely to put food on the table is no longer considered productive behavior. Fishermen spend a fortune on equipment and travel to exotic destinations to fish. After a great day of catch and release fishing, they go to a restaurant and spend $20 on a plate of salmon.

I enjoy fishing with my children and don’t intend to quit any time soon. I can’t help but wonder what areas of my life and of our society, were once crucial to survival, but have been reduced to a novelty.

Wealth Preservation, Tax Mitigation & Regulation

Notes from the 2010 TD Ameritrade Conference
Photo Courtesy of TD Ameritrade

If you have ever gone to a conference for your industry, you may relate to this. So much information is shared on diverse topics; ideas certain to improve services to clients. Often when returning to the office, catching up and getting back in the swing of things can hinder progress. The following is a summary of the conference highlights for the 2010 TD Ameritrade Institutional conference for financial planners. We share this information as a reminder to us and as information to clients.

Three major themes seemed to echo at this year’s conference. These ideas seemed to match with the concerns that are resonating in the hearts and minds of clients. As industry experts discussed where we have been and where our country is headed, there was certainly a focus on preserving wealth, managing tax changes, and the regulatory changes that will affect our industry and consumers.

George W. Bush and Bill Clinton spoke to the crowd on the events of the past few years. The pair was asked to describe their most important decisions. President Bush mentioned that during the turmoil in 2008, Ben Bernanke and Henry Paulsen warned him, “If you don’t move, you will likely oversee a nation in the midst of a depression greater than The Great Depression.” Bush followed up saying that the decision “to sell my soul and bail out Wall Street was not one of my proudest moments, but it was important.”

Through the turmoil of the last three years, investors have moved from growth mode to a desire for preservation. Fred Tomczyk, the president and CEO of TD Ameritrade, pointed out that TD Bank is one of only four AAA rated banks in the world. TD Ameritrade, through its partnership with TD Bank, was able to support clients in their goals for asset preservation through FDIC Insured money market and cash management strategies. Tom Bradley, the president of TD Ameritrade Institutional, shared that “TD Ameritrade’s role for clients is to provide safety and security for clients’ assets and best execution on trades.”

We heard further thoughts on wealth preservation from fixed income strategists and portfolio managers. Advisors expressed clients’ needs for security and experts shared preservation strategies.

One of the largest threats to clients’ wealth is taxation. Don Drummond, an economist for TD Ameritrade, emphasized this point. He shared a chart of U.S. Revenues vs. Spending, the gap between the two ever widening. “Without a tremendous policy change,” Drummond said, “taxes will have to increase dramatically.” George Bush also suggested that “Government can’t spend their way out of this… it will not lead to prosperity. Prosperity will come through stimulation in the private sector.”

Ed Slott, a consultant to accounting firms, suggested that “our tax system is a penalty on savers.” One of the biggest threats to clients’ assets is increasing taxes. “Tax rates are lower now than we will ever see again,” Slott went on to say, “Taxes on an IRA are like a cancer that is not going away.” He spoke to the substantial changes in taxes and the opportunities and pitfalls presented by the 2010 Roth Conversion.

This is just one of many changes that have occurred or will occur in the coming years. The financial industry and American consumers will be faced with new regulation from all sides.

When asked about this regulation and the need for accountability and a fiduciary standard in our industry, former presidents Bush and Clinton were at a loss for words. Bob Veres, a well published financial author was shocked that “the leaders of the free world for 16 years didn’t understand the importance of the fiduciary standard.” Upon further discussion, Bill Clinton mentioned that “transparency is crucial.”

Transparency is a key issue. There are folks that act as fiduciaries in the industry who are legally obligated to their clients. Proposed regulations would force many brokers and financial salesman to act as a fiduciary when preparing a financial plan, but would allow them to remove their fiduciary hat and put on a sales hat when suggesting products. Such advisors are known as “dually registered advisors”. Tom Bradley with TD Ameritrade said, “We think this is a conflict that needs to be eliminated. That is what we are trying to educate the SEC on.”

In an effort to further protect clients, TD Ameritrade has joined groups including NAPFA (The National Association of Personal Financial Advisors) and the FPA (The Financial Planning Association) in an effort to ensure that new regulations will benefit consumers. These groups are working on your part, not only on the Fiduciary Standard, but on regulations that deal with a Standard of Care in the financial industry and proper oversight for Registered Investment Advisors. They are also working against a proposed transaction tax on trades that would be used to pay down TARP.

It was extremely interesting to watch as former presidents from opposite parties came together, related well to one another and appreciated the work that each had done. One can only hope that folks on Capitol Hill can reach across party lines to look out for the needs of Americans and to take a realistic look at our growing national debt.

It is refreshing to have a partner and a system of checks and balances for clients through TD Ameritrade. It was also good to hear that we are not alone in our concerns about taxes and protecting assets.

Jan 20, 2010

Washington Promotes Haiti Relief Through Tax Breaks

Contributions for relief in Haiti may count toward 2009 taxes.  More on the House vote, Haitian relief and your taxes:

Jan 11, 2010

Uncle Sam and the Rent-to-Own Scam

Get your Roth IRA today and make no payments until 2011!

Kronk's Shoulder Angels

In the movies you will see the main character facing the dilemma of a lifetime. Suddenly a miniature person will appear on each shoulder. The first will prod her to make all of the wrong decisions while the second character guides her down the straight and narrow.

Occasionally when working with folks, I see this situation playing out as well. However, the shoulder people are a bit different. On the left shoulder is the spender and on the right shoulder is the saver. The spender suggests that you can have everything you want right now; no need to wait. He drags his person into rent-to-own furniture stores and helps them rack up a bill that will destroy their finances for decades. The saver says, “let’s think this through, wait 30 days, and see if you still need that.”

The IRS has offered a so-called ‘break’ for folks converting their Roth IRAs in 2010. They can get their shiny new Roth IRA today, hassle free. Instead of making a big tax payment now, they will make two easy payments in 2011 and 2012.

The side of my financial conscience that encourages me to save shuttered when he heard this. He said to me, “there is something wrong here. Why don’t we check it out?”

Here is the problem. The current taxes are, in many ways, at historical lows. The good news is that the new rates for 2010 are not substantially different than they were for 2009.

The problem comes in 2011 when the EGTRRA (Economic Growth and Tax Relief Reconciliation Act) expires. Tax rates will go back to the rates that were in place before the act was signed into law.

Under current law, a couple who files jointly will have to make $137,300 in order to reach the 28% tax rate. Under the old-school, pre-EGTRRA rules, the same couple would reach the 28% bracket at $43,850. Under the old law, they would reach the highest marginal tax rate (4.6% higher than our current max) at only $288,350, compared to today’s maximum rate which will only affect folks who make more than about $370k.

The saver on my shoulder broke it down so I could understand it. He said that if the folks in Washington didn’t adjust these tax rates, that would mean a much bigger tax bill for some of the folks that convert and put the Roth Conversion tax off. Even if we do see updated tax law, it is doubtful that future rates will be as low as the ones in 2010.

This was not designed to be deceiving; it is simply the perfect storm for the spending side of the financial conscience to wreak havoc on American’s pocketbooks.

The 2010 Roth Conversion Decision is complicated enough. In many cases the theory is sound. There are clear benefits to a Roth Conversion; tax-free growth and no Required Minimum Distributions. When it comes time to write a big check to the U.S. Treasury, things change. It is like taking the step out of a perfectly good airplane, trusting that whoever packed your parachute knew what they were doing.

My concern is that folks will listen to the part of their brain that says, “You need this.” They will give in to the voice calling out, “Buy now and pay later.” They will convert in 2010 but put the tax bill off without considering the consequences.

It goes deeper than just the future tax rates. When you convert a Roth IRA, the Feds will want their cut, but the state will expect their share as well.

Not every state has a rent-to-own program for the Roth Conversion; instead, many states will require that you pay your taxes with your 2010 return. Many of the ‘buy now & pay later’ crowd will be in shock when their state taxes are calculated and they owe the entire state tax in the year of the conversion.

Until we know exactly how the Federal Government will change the rules in coming years, all we can do is make our best guesses and watch out for pitfalls. We could see changes, not only in tax rates, but even in the structure of the different retirement vehicles.

We have seen very few cases (if any) where we thought it was a good idea to convert the entire amount in one year. It is often much more beneficial to convert the amount above your taxable income, up to your next tax bracket. By doing this, you can avoid needlessly leaping up through tax brackets all in one year. This would allow you to pay some of the tax this year and to make a decision whether to convert another portion of your IRA to a Roth in future years based on how the rules have changed.

If you are considering a Roth Conversion, it might be a great idea to gather your accountant, your attorney and your financial planner together to discuss your finances moving forward. Each situation is unique, but these folks can help you determine whether the 2010 Roth Conversion is right for you. They will offer a checks and balances system and help you look for pitfalls.

Consider this a check-up to the saver on your right shoulder. If she doesn’t jump out of her seat when she hears ‘rent-to-own’ or ‘buy now & pay later’, it may be time to have your financial conscience re-calibrated.

Jan 8, 2010

"Adding years to your life and life to your years!"

Dan Buettner shares some great insights on adding years to your life and life to your years. He suggests that the two most dangerous years in life are the year you are born and the year that you retire. His comments reminded me of a study of Martin Marietta employees, folks who were passionate and committed to their jobs. The company found an overwhelming mortality rate during the first year of retirement because employees, who found extreme purpose in their careers, were suddenly jettisoned into the unknown, lacking the purpose that they had been accustomed to. The company determined to implement a plan to ensure that retirees had a plan before they left the company. I hope that Dan's comments in this 20 minute video are food for thought.
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