August
2006
A Monthly Newsletter Source of Financial Sources
Don't miss this month's timely story ideas, direct dial phone
numbers, and E-mail addresses of these accessible experts!
401(k)
• Independent Advice Providers Help Plan Sponsors
Avoid Conflict of Interest
INVESTMENTS
• Certificates of Deposit Continue to be a Popular Investment for the Risk Averse
RETIREMENT
• What You Can Spend in Retirement Can be a Surprise and a Burden
• Trust in an Advisor Matters When Estate Planning Details Confuse Those Left Behind.
Sources of income may change after the death of a spouse.
PERSONAL FINANCE
• The Excellence of WorldCare North America’s Provider Hospitals Confirmed as they Earn Honor Roll Status from U.S. News and World Report’s "America's Best Hospitals"
LONG TERM CARE INSURANCE
• Purchasing Long Term Care Insurance for Your Parents Could Be a Really Smart Move for Future Caregivers.
• New Long Term Care Insurance Product Designed to Cure Sales Slump
CLIENT EDUCATION
• Financial Advisors Must Grasp The New World of Work for Retirees: Seminars that help clients discern what work they will do in retirement are key to the right financial plan.
401(k)
Independent Advice Providers Help Plan Sponsors Avoid Conflict of Interest
Conflict of interest in the investment advice business will be the topic of much debate this fall. As the Pension Protection Act's impact is evaluated, what is clear is that advice coming from the investment provider, despite an inherent conflict of interest, is now legally allowed. With the new congressional mandate, the retirement industry can now turn away from the failed education/information approach that may feature some or all of the following:
1. Enrolls all employees in their company's 401(k) plan unless they choose to opt out.
2. A 401(k) plan will now provide default investment choices that are pre-defined to provide a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both, and
3. A plan that schedules automatic increases in contribution levels, unless again, the employee chooses to opt out.
Large plan sponsors working with independent consultants have always required them to provide them with solutions for investment advice that were conflict free. Even despite well-intentioned efforts by Congress, plan sponsors are still going to put a premium on providing conflict-free investment advice to their participants.
There are several key issues that plan sponsors must deal with when considering an advice provider for their 401(k) participants:
1. To provide the best and most independent advice they can find.
2. Their desire to keep product representatives from prospecting or cross selling their employees under the guise of helping with investment advice.
The downside of the new regulations is the possibility that the investment providers will have greater influence over the fund lineup within the plan, and that the provider could reduce the use of outside funds, instead favoring their own proprietary funds.
What is clear is that if a participant, unhappy with his retirement savings in the company 401(k) plan, he could come back to the company and file formal complaints about the inherent conflict of interest in a plan that offered advice from the investment company providing the investment product.
"We know plan sponsors are still opting to find and hire independent advice providers. Despite the fact that investment providers will soon be making advice programs available, plan sponsors are asking for and searching out advice companies whose advice is not connected in any way to the 401(k) plan's investment choices," says Tim McCabe, 401k Toolbox, one of the leading independent investment advice and managed account providers.
PMFM, Inc. manages $680 million as of June 30, 2005. The firm has increased its assets under management by nearly 40% in each of the last three years. Principals Tim Chapman and Don Beasley, experienced investment advisors with offices just outside Athens, Georgia, have worked with thousands of clients and now offer their services to plan sponsors through 401k Toolbox. Jud Doherty, CFA, is the chief financial officer for the firm, and Tim McCabe is national marketing director. Tim McCabe -- 800-222-7636. Tim.McCabe@pmfm.com
INVESTMENTS
Certificates of Deposit Continue to be a Popular Investment
for the Risk Averse
As the Federal Reserve has increased interest rates over the last couple of years, CDs have become more attractive. The concept is simple: you give your money to a bank for a predetermined period and they promise to return your principal plus a little interest at the end of the time period. For amounts under $100,000, you have the bonus of FDIC insurance.
The downside to CDs includes a lack of liquidity (you lose the interest if you ask for your money back early), the return guarantee also guarantees a low return and once the CD has matured you may be reinvesting the money into a lower yielding CD. Also, moving your money from bank to bank to obtain the highest yielding CD can be time consuming and burdensome for the individual.
One approach to reduce these risks and inconveniences is to establish an account at a low cost brokerage firm and then ladder the CDs.
The duration of a CD can range from several months to several years. The longer the duration, the higher the yield the bank typically offers. The risk of choosing a 3 to 5 year CD is that you may miss out on higher rates in the near term. If you had locked in a 5-year CD two years ago, you probably would be kicking yourself looking at today's rates. If you invest at a peak and then rates decline, you get the benefit of the higher yield, but you may have to reinvest at a much lower rate upon maturity.
When you ladder CDs, you purchase a new CD every month with a portion of your assets. Typically each CD has a one-year maturity. In this manner, you smooth out the interest rate ride because only a portion of your money is invested at every stage. When one CD matures, you can reinvest it in highest yielding new CD. If you have need for cash, you know that each month a CD is maturing and you have access to it without paying a penalty.
The technique of laddering CDs can offer people more consistent yields and more liquidity with less effort.
Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfs@usinternet.com.
RETIREMENT
What You Can Spend in Retirement Can be a Surprise and a Burden
Unfortunately, when pondering retirement, most people ask, “Do I have enough?” However, for those who have been diligent about saving and investing over their careers and have maintained a moderate lifestyle, the answer to that question is often a resounding “yes.” In fact, wealthy retirees frequently do not understand that they could never spend down their assets in the normal course of the rest of their lives even under very conservative assumptions. Their portfolios are sizeable enough that the “Wow, I didn’t realize I could spend so much,” is often followed “what are we going to do with our lives given our substantial excess assets?” -- a conversation they seemed surprised to be having.
Of course, coming to such a conclusion is the result of careful analysis and modeling using conservative assumptions with regards to investment returns, inflation, tax rates and a variety of other inputs.
With this type of analysis in hand, many wealthy retirees realize that earning higher rates of return from their investment portfolio will only produce more assets they will not spend in their lifetime. This raises a series of questions that they may not have considered in the past.
First, should the investment portfolio be made more conservative – “Why take on the extra risk if I don’t have to?” Or, should the investment portfolio be aggressive “Why not shoot for higher returns since a substantial decline in the market will not hurt me?”
Another equally important and more difficult question is what to do with the excess assets. A discussion of charitable giving is one way to help investors fulfill their philanthropic urges even though they can be surprised to be in the position of making a difference with gifts to non-profits. The stickier wicket, often, is how to gift these excess assets to children. More than one wealthy set of parents voice their concern about ruining their children’s incentives to pursue meaningful work because their inheritance could be substantial.
Kevin Dorwin, CFA, is a Portfolio Manager with Bingham, Osborn & Scarborough LLC (BOS), a San Francisco and Menlo Park, California-based registered investment advisor with approximately $1.5 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. BOS has eight principals plus eighteen team members working on behalf of their clients, including seven credentialed portfolio managers with direct client contact and eleven operations, administration, finance, compliance, and systems staff with responsibilities related to client accounts. Kevin. 415-781-8535.
Trust in an Advisor Matters When Estate Planning Details Confuse Those Left Behind.
Sources of income may change after the death of a spouse.
There is a reason why thoughtful families make an effort to choose an advisor who can help a family understand financial arrangements after the financially savvy partner has died. Seldom are both spouses equally informed about financial arrangements, in particular, the details of the family’s trust. Depending on the size of the estate, the trust holds all or a part of the family’s assets to shelter them from future estate taxes. Great confusion can occur when the source of assets that provide income must change after a death.
While there are seldom any major changes that will occur in the estate planning, there are often administrative details that are difficult for the remaining spouse to handle, both emotionally and perhaps cognitively, if the spouse is elderly and not well. Choosing an advisor and getting to know the advisor’s staff early on in the estate planning process becomes an important part of managing the changes to the estate plan after a spouse’s death.
Estate planning will often segregate assets into the decedents trust accounts to take advantage of their tax-exempt status, making it important for the surviving spouse to not spend assets that are tax exempt but spend the assets that are non exempt.
Take John and Sarah. Sarah was the money manager in their family. When she died, John was not aware that Sarah’s segregated assets were now tax exempt according to the terms of the trust. Their joint income had come from her assets and it was no longer available to him if he wanted to keep it tax exempt. Now John’s income needed to come from John’s non tax-exempt sources. But John was resistant to change and without a long term relationship with his advisor and the advisor’s staff, might not have been willing to draw the income from his assets that were not tax exempt. Had he stubbornly refused to adjust the estate plan as appropriate after Sarah’s death, he could have faced serious loss of income for a protracted period of time or created unnecessary death taxes for his children.
Under another scenario, if the remaining spouse needs cash, illiquid (real estate) assets could be sold to the decedents estate in exchange for liquid assets such as cash.
In John and Sarah’s situation, it was very important to have the advisor working hand-in-hand with the estate attorney to make sure assets are titled correctly and that necessary documents filing changes are completed quickly after the death of the first spouse to enable the surviving spouse to have continuity in his income a sense that his financial well being is strong.
Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients’ families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect
and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net.
PERSONAL FINANCE
The Excellence of WorldCare North America’s Provider Hospitals Confirmed as they Earn Honor Roll Status from U.S. News and World Report’s "America's Best Hospitals"
Four of WorldCare North America’s top hospitals earned Honor Roll Status in the July issue of U.S. News and World Report's annual ranking of top hospitals. This distinction reinforces that WorldCare memberships provide consumers with access to top physicians, cutting-edge medical practices and best medical advice.
Out of 5,189 hospitals, only 3 percent, 176 in all, are ranked in one or more of the 16 specialties in this year's U.S. News and World Report's "America's Best Hospitals." Only 14 qualified for the Honor Roll by ranking at or near the top in at least six specialties. The honor roll rankings of WorldCare Provider Hospitals are: #4 Massachusetts General Hospital, #5 UCLA Medical Center, #7 Duke University Medical Center, #11 Brigham and Women's Hospital.
WorldCare, through its affiliations with some of the country’s top-ranked hospitals, provides WorldCare Consults. Teams of physicians provide members facing important medical decisions, with comprehensive, independent reviews of their diagnoses. The physicians works with a member’s physician to gather medical records, check the file to insure it is complete, make treatment recommendations, and send records to the medical institution or institutions best suited to address the medical condition, all within four business days. WorldCare Consults are independent of insurance guidelines and geographic constraints.
WorldCare Consults may be offered through employee benefit providers, banks, credit card companies, insurance companies, HSA providers, and other resellers.
WorldCare’s provider hospitals include:
Brigham and Women’s Hospital, Dana-Farber/Partners CancerCare, Duke University Medical Center, Massachusetts General Hospital, and UCLA Medical Center.
To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America
Cambridge, Mass., 617-250-5167 or e-mail jflynn@worldcarena.com.
LONG TERM CARE INSURANCE
Purchasing Long Term Care Insurance for Your Parents Could Be a Really Smart Move for Future Caregivers.
Boomers often don’t realize that the long term care insurance (LTCI) that objective advisors encourage them to buy for themselves is an important solution to their sandwich generation bind of caring for themselves and their children as well as their parents.
LTCI continues to evolve and improve. Adult children don’t want their parents to have to spend down their assets for long term care or be limited to the choices – or lack thereof – that the Medicaid system offers. The alternative seems to be the adult kids paying for care if it’s needed. Nursing homes can easily range from $3,000 to $6,000 a month or more, depending on where they are located geographically.
LTCI premiums range from $2000 a year, or $160 a month to $3000 a year, depending on the type of policy. When a claim is made and depending on your policy design, you have choices in how your elder will receive their care -- at home, in a private pay assisted living facility, or nursing home. Adult children who pay the annual premium on a policy for their parents can use it to greatly offset or possibly completely cover the cost of that care for their parents. Most importantly, your financial obligation has ended when a claim on your parent's policy is made. For those without such insurance, the need for care is the beginning of
Broaching the subject with parents can be difficult and it should be done while they are relatively healthy. One strategy is to tell their parents that they’ve purchased the coverage for themselves and that they think it’s important in terms of maintaining control over long term care options if they need care. Another is to have all the adult children come together and present the concept as a joint gift to the parents.
When the Boomer’s siblings don’t want to participate it can prompt some estate planning discussions. The trend of daughters as caregivers for parents rather than sons continues. What if one daughter opts to pay for long term care to give her parents control over choosing the type of care they get and where they get it as well as minimize the possibility that she will be called upon to provide care directly. However, her sister opts not participate in paying the premiums. The parents might consider a will that give the premium paying daughter more of the will’s proceeds than her sibling who chose not to participate in the insurance plan. Or, if the siblings have very different financial situations and one feels he can pay, but the other doesn’t, the siblings might agree that the less wealthy sibling would do the research on the policies, look into costs in the area, and be responsible for the logistics involved in moving the parents if the need ever arises.
Purchasing long term care insurance for parents is a planning strategy that can lessen the financial worry, the future financial burden of care, as well as the emotional exhaustion of long term care giving for all children in a family caring for their aging parents.
Linda Leitz, CFP, Pinnacle Financial Concepts, Inc., Colorado Springs, Colorado, is author of The Ultimate Parenting Map to Money Smart Kids,” as a book or as a CD. She specializes in helping families and individuals meet their long- term financial goals. She also helps those in the midst of divorce resolve financial issues through her company Divorce Solutions, Inc. She can be reached at 719-260-9800 or Linda@brightleitz.com.
New Long Term Care Insurance Product Designed to Cure Sales Slump
A new, agent-designed LTCI product has been designed to pull long term care insurance sales out of the slump they have been in since 2004. Products are sometimes described as too complex and the perceived benefit too many years out in the future for today’s baby boomer buyer. Policy riders designed to sweeten the pot for consumers haven’t been compelling – until now! A revolutionary new product, with groundbreaking unique riders, will give the industry a shot of adrenaline, making sales faster and easier.
Security Advantage™ is unlike any other LTCi product. The Maximum Lifetime Benefit Acceleration Rider provides more long term care protection for baby boomer buyers who may have early claims. “With ordinary limited benefit long term care insurance policies, a policyholder doesn’t see the policy’s ultimate value for 20-30 years down the road. This rider allows an agent to show a baby boomer buyer an immediate policy value that can be four times the amount of dollars available in ordinary long term care insurance. We call the concept ‘More Money Now,’” says Ronald Hagelman, President of Republic Marketing Group, Inc. Policy holders with a less-than-lifetime benefit period can immediately access the inflation-adjusted amount of money the policy would be worth at age 85 through the purchase of a Security Advantage™ policy.
Security Advantage™ also features a Return of Premium rider unlike any other long-term care insurance policy. Typically, return of premium riders refund, at death, total premiums less claims. Security Advantage’s Return of Premium rider gives policyholders a better choice. They can either: surrender the policy before age 75, and receive a check for their premiums paid, less any benefits collected; or, if they choose to keep the policy, beginning at age 75, all past premiums paid and all future premiums will be added to their policy’s benefits. “Baby boomers want options. With Security Advantage™ they can get their own money back in their own pocket. You don’t have to die to get your money back with our return of premium!” says Barry J. Fisher, CSA, LTCP, Republic marketing’s Vice President and Chief Marketing Officer, “With the Acceleration Rider and the Return of Premium rider, Security Advantage™ is the clear choice for long term care insurance.
Republic Marketing Group, Inc., of New Braunfels, Texas, is the national distributor of Security Advantage™ long term care insurance, available only through their network of independent SMOs and BGAs.
Agents may get more information on Security Advantage™ Long Term Care Insurance by calling 20+ year LTCI industry veterans Ronald Hagelman (830-620-4066; Ron@rmgltci.com) and Barry Fisher (818-489-1839; Barry@rmgltci.com). Product is not available in all states. Limitations and exclusions apply. Underwritten by Loyal American Life Insurance Company®.
CLIENT EDUCATION
Financial Advisors Must Grasp The New World of Work for Retirees:
Seminars that help clients discern what work they will do in retirement are key to the right financial plan.
Advisors have a responsibility to educate their clients about retirement and work. There are three ways to begin the process: Adapted fact finders that reflect the new reality that more than 75% of Americans expect to work in retirement; knowledgeable one-on-one conversations with clients and their partners; and client appreciation group meetings focused on work, the so-called “fourth leg of the retirement stool.”
The client appreciation group meeting is a cost effective, high-touch way to show that your level of commitment to each client goes beyond the financial numbers. And sometimes, a group meeting reveals new and important information about the client.
Working into what used to be the “retirement years” is a reality for even the most affluent boomers and their older siblings. A number of recent studies show that baby boomers and their older siblings expect to work. The Merrill Lynch 2005 study found that 76% include work in retirement plans, and that includes almost 13% who expect to start or buy businesses.
Many dream -- 56% data shows – of launching a new career or starting a business. Are they being realistic? Will their financial assets be enhanced or depleted by starting or buying a business? What will be the impact on their long-term financial well being of investing in an entrepreneurial venture?
Others want to work part-time or on a project basis for their current employer, but haven’t considered the impact on their pensions. Are their ways to protect pension income and still gain compensation from work?
Retirement or life planning coaches can be brought in to client meetings to facilitate the unearthing of clients’ dreams and aspirations. As outside experts in a group setting, they can probe to discover the more personal issues around retirement, such as relocation and spouses differing aspirations or goals. Clients can learn how to create a portfolio of paid and volunteer work that allows time for leisure activities. They can learn about the seven ways of working differently in “retirement” years, and gain tools to get the kinds of work that will satisfy them,
The client appreciation group focused on work in retirement shows financial clients that their advisor is interested in them as a whole person. They leave with ideas, new goals, practical tips, and a better understanding of how and whether their retirement portfolio will support their goals and aspirations.
Anne Hartman is Managing Partner of Working Differently, a firm consulting with individuals and organizations to redefine retirement. Her book "Working Differently: A step-by-step guide to finding work that works" will be published in the fall of 2006. She can be reached at anne@working differently.com, or 508-349-7921
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