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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts!
INVESTMENTS AND WEALTH MANAGEMENT
The
Impending Beneficiary Crisis:
A Wide Variety of Incomplete, Outdated, Incorrect or Missing The lack of retrievable, practical information everyone needs to deal with most financial and health issues is an impending beneficiary crisis. Conventional financial planning focuses on putting in place legal documents such as wills, durable powers of attorney, health care proxies and trust agreements, all crucial elements in dealing with these “aging” or “end of life” issues. However, these documents fall painfully short in providing the every day, basic information necessary to guide beneficiaries. The search for missing, essential documents such as investment accounts and health plans can overwhelm both well-intentioned caregivers and beneficiaries. The dire results of not collecting documents in one file, and in one location, accessible with one call, include:
There are many steps to take to avoid the beneficiary crisis,
Mark Kaizerman, CPA, CFP, is the author of “Beneficiary Directory: Your Personal System to Organize Your Important Documents and Guide Your Beneficiaries. www.beneficiarydirectory.com, a new book that offers a broadened concept of client fact-finding during the initial discovery process, He can be reached at 508-647-0830 x 13, or for a copy of the book, contact the author at mark@beneficiarydirectory.com. Financial Advice & Custom Home Buying Should Go Hand in Hand. When considering what options and upgrades to choose with their custom homes, consumers often neglect to evaluate the short and long term financial impact of their decisions. For example, look at a buyer who is considering a $700,000 home with 20% down ($140,000) and a 30-year mortgage at 6% with monthly payments of $3,357. What is the financial impact of adding a home theatre and finishing the basement now vs. waiting a year or two? Or, what is the impact of adding some square footage and a few rooms for an elderly mother who is in need of assisted living? In order to answer these questions, homeowners should consult with mortgage planners who can look at their monthly cash flow and evaluate the long-term impact of their custom home buying decisions. In this example, let’s break down the potential upgrades into a monthly cash flow number. Let’s assume the buyers utilize a 5.25% interest-only mortgage where the interest rate is locked in for 5 or 7 years, instead of the 30-year mortgage that they initially planned on using: 1. Finished
Basement with Home Theatre & Exercise Room = $115,000 upfront
cost or $503 monthly cost. In this case, the buyer should ask whether the finished basement with the home theatre and exercise room is worth an extra $503 per month? Chances are that they and their children would spend a bit more time at home if they had the opportunity to entertain themselves and their friends with these added features in their home. In fact, it is even possible that they could potentially save some money each month by entertaining themselves inside their home vs. going outside of the home for entertainment. What about the $438 per month for the extra space for the elderly mother? The average assisted living facility is $4000 a month, quite a bit more than the $438 per month cost of having her live with them in their home (albeit in a different section of the house). However, let’s assume that the buyers don’t save any money at all on the assisted living expenses for their mother, or on their monthly entertainment budget. Are these upgrades still worth an extra $941 per month? Remember these clients were prepared to spend $3,357 with a 30-year mortgage to buy a $700,000 home. Now, they are buying a $915,000 upgraded home with the same down payment ($140,000), and a $3,411 monthly payment with a 5 or 7 year interest-only ARM. If the $700,000 home goes up in value 3% each year for the next 5 years, it will be worth $811,000 at that time and the buyers would have $290,000 in equity. If the $915,000 home goes up in value by the same 3%, it will be worth $1,060,000 in 5 years and the clients will have the same $290,000 in equity although they’ve paid no principal at all against their mortgage. Consumers can build the same equity and enjoy a much higher standard of living when they work with mortgage professionals who give them sound financial advice. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a private mortgage planning firm based in Ann Arbor, MI specializing in helping affluent families maximize wealth by successfully managing the equity in their home and other real estate properties. Phone: 888-608-9800 Email:Gibran@NicholasCity.comWeb Site: NicholasCity.com. No IPS Yet? Why You Should Not Invest Without One! There is no more critical time to understand your investments and what you are asking a financial professional to do for your portfolio than when you stop working. Whatever your lifestyle, that retirement moment brings significant responsibility for the investor. An Investment Policy Statement (IPS) is essential to protect your retirement investments going forward. Recent, egregious examples of bad money management featured in the news reported a 90% loss of retirement funds sustained by a factory worker by his broker. These "riches to rags" stories are in the news too frequently. The broker's firm says that the client agreed with the broker's strategy. These stories should make every investor ask the same question -- "Am I on the same page with my money manager”? An updated IPS is the only way to be secure in the knowledge that everyone understands what you want done with your money in retirement. Most brokerage firms have extremely simplified forms, asking you to choose between conservative, moderate and aggressive management styles for your portfolio. These forms are woefully inadequate in addressing how a client's assets should be managed to meet the client's expectations. They offer too general a description when what is called for is specificity. A properly structured IPS becomes a true "blueprint" for your financial success. The development of a proper IPS creates a greater degree of protection for you no matter who you choose as a money manager. Some of the questions an advisor should ask you include your risk tolerance, time horizon, and your needs for cash flow, whether or not you have any tax sensitivity, and where you stand on social issues in terms of investments you will accept. The IPS should cover your goals, objectives, and dreams in a detailed document. An advisor needs to understand where you stand on social security, expected costs of health care, your plans for relocation, as well as one-time expenses, such as changing your state of domicile when you retire to Florida, costs of buying a second home, or what you expect to spend to upgrade your home now for handicapped accessibility later. Your IPS should be updated at least once a year, and clearly state what you believe are optimal investments for your portfolio. The IPS should be available to anyone managing your money. It is wrong to bank your future on a brokerage document that asks a simple question about whether you want growth or income as your investment strategy. Find an advisor who starts the conversation by asking if you have an IPS. And if you don't, makes it a priority to help you create one. An IPS is not perfect, but not having one increases the chance of having an account mishandled. Don't take that chance. Gary K. Hager, CFP, Founder and President, Integrated Wealth Management, Edison, New Jersey, a full service wealth advisory firm, serves as the primary financial resource for affluent families and closely-held business owners, providing state of the art planning solutions which effectively integrate the disciplines of Wealth Accumulation and Wealth Preservation. Contact:ghager@iwmco.com, 732-510-1611. Roth
IRA vs. 529 Plan - Which is Better for College Savings? There are several advantages to using a Roth IRA. Since most parents are saving for retirement and college at the same time, the Roth IRA offers flexibility. When the time comes for a child to go to college, a parent can decide then whether to use funds in the Roth or not. Any funds not needed for college can be left in the Roth for retirement. A Roth IRA also offers much more investment control and flexibility in investment options. Options in a 529 plan are limited to those offered in each state’s plan. Roth IRAs offer an important advantage if a family plans to apply for financial aid. Those schools that use the federal financial aid formula do not count assets in retirement plans (including Roth IRAs) when calculating the family’s expected contribution. For a 529 plan owned by a parent, the assets are counted as the parent’s assets in the formula, and the year after the money is withdrawn, will likely be counted as the student’s income, thus reducing the student’s eligibility for financial aid. For both a Roth IRA and a 529 plan, contributions are made with after-tax dollars. Investments in the either account grow tax-deferred. Withdrawals from a 529 plan for education purposes are tax-free (except where a few states still tax them.) However, in some cases, some funds withdrawn from a Roth IRA may be subject to tax. If the owner is under age 59 ½, income taxes will be due on the earnings (but not the contributions) that are withdrawn from the Roth IRA. However, as
long as the withdrawal is for educational purposes, it is not subject
to the 10% penalty for pre-59 ½ withdrawals. If the owner
of the Roth IRA is over 59 1/2, and the account was started at
least 5 years ago, there are no taxes or penalties due on withdrawals.
This potential for taxation of earnings withdrawn before age 59
1/2 is the biggest potential drawback to using a Roth IRA for college
savings; the benefit of tax-deferred compounding is offset by the
cost of converting capital gains and dividends into ordinary income,
thus losing one of the primary benefits of the Roth IRA. The bottom line: For most parents, saving for retirement should be their first priority. There are safety nets (in the form of financial aid and/or lower cost colleges) for education, but there are no safety nets for retirement. Susan Moore, CFPR, Moore Financial Advisors, Ltd., Watertown, MA, provides fee-only financial planning and investment management services for individuals and families, specializing in services for same sex couples and non-traditional families, as well as individuals in all stages of divorce. She is also President of PridePlanners. She can be reached moore@mooreadvisors.com or 617-393-9999.
INVESTMENTS AND WEALTH MANAGEMENT 401
(k) Managed Accounts: Managed accounts for 401(k) plan participants are not new. What is new are the startling differences in participant's choices when confronted with the reality of investment risk and market risk and how that plays out in managed accounts. Diversified passive model portfolio services that include "rebalancing" assets quarterly or annually, claim to be able to protect participants from investment risks. However, that presumes that the participant will use the model portfolio correctly. Take lifestyle mutual funds for example. Each individual lifestyle fund is well diversified to achieve its objectives. However, most participants do not use lifestyle funds correctly. Rather than picking one fund that matches their long-term objectives, many investors put 10% of their monthly deferral into ten different lifestyle fund choices available in their plan. All the education and advice in the world doesn't stop participants from using lifestyle funds incorrectly. More importantly, lifestyle funds, even when used correctly, do not protect against market risk in any way. The market goes up and down, and the funds go up and down. Participants do understand market risk. One of the shortcomings of passive model portfolios has to do with the realities of bad markets. Passive model portfolios, rebalanced on a calendar basis, do not adapt for adverse market conditions, subjecting the investors to potential bear market conditions. Reducing equity exposure in a model portfolio as participants get closer to retirement lowers the losses in a passive portfolio, but does not eliminate them. Consider a participant, 60-years-old, with $200,000 in a retirement account. If his model portfolio loses 20 % of its value, he has taken a $40,000 loss in his account. He will need to earn an unrealistic 33% return to get back to where he was before the decline. That $40,000 may make the difference between the investor being able to retire or having to continue working longer than expected. Contrast that to an actively managed portfolio with sell disciplines that has the ability to protect this investor when the market heads south, because a professional manager is making active investment decisions on a daily basis. Both active management and passive model portfolios have uses in a retirement plan, depending on age. The passive portfolio that rides up and down with the market is better suited to the younger investor with a longer time horizon. Pre-retirees, though, should consider active management to protect their assets as they get closer to retirement day. PMFM, Inc. -- Since the early 90s, PMFM has managed assets for a wide range of clients, including individual investors, trust accounts, and qualified retirement plans. PMFM is a registered investment advisory firm located in Athens, GA. They offer separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) investment advisory services in the nation. PMFM manages approximately $650 million in assets as of September 30, 2004. Contact Tim Chapman at 800-222-7636. Choose Your Professional Advisors Carefully For Real Estate Investing So You Can Acquire the Education You Need to Make Tax-Efficient Decisions. A first home purchase is usually a family's first foray into real estate and the advisors are the real estate broker, and mortgage professional. The next stage usually occurs when families have accrued enough assets to buy a second home, or land for a future dream home, or rental income property. Some families may look to an advisor at this time. Most do not. But when the family gets to the next stage of selling their primary residence in order to downsize, or selling an appreciated second home, land or rental property, they should be looking for professionals with experience in all of the financial planning options that surround real estate transactions. For instance, they can sell their appreciated second home, land or rental property and pay taxes on the gain. Then, they can reinvest the after-tax proceeds. However, before they pay this tax, they should be aware of all the options available that may mean keeping the house or exchanging the house. Those options include:
All options have advantages and disadvantages. To determine what is best for you, find a financial advisor with experience in real estate options. Such a firm will normally include a lawyer, an accountant and a financial planner, who regularly work together to help families make educated decisions. Call a firm that has extensive experience in all these real estate options. A family's tax savings could amount to hundreds or thousands of dollars. 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, their 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 Five Reasons Brokers Feel Compelled to Consider Changing Firms. Brokers tend to tolerate the annoyances, minor or otherwise, at their current firm until an event occurs that makes looking at job options foremost. Propelled by real problems as well as perceived injustices, a broker tolerates a great deal until there is a defining moment when he realizes that a move might be the best alternative. For example, a million-dollar-plus veteran wirehouse producer thought he would spend the rest of his long career at his present firm. Recently, however, changes in top management and in branch management, negative changes in compensation, and the need for greater support were the "straws that broke the back" for this particular broker. As a result, he will soon join a different wirehouse where he will receive an aggressive transition package of 1.2 times his trailing 12 months production up front (100% of which will be in cash,) plus incremental bonuses at months 12 and 24 to compensate him for un-vested deferred comp. Here are several reasons brokers change firms: Changes in
compensation Changes in
local branch management. Deterrents
to growth When present
firm is sold The lure of
independence Overcoming inertia sooner than later puts the broker in the best position when events at their current firm spiral out of control and impact their ability to direct their career and grow their business. Mindy Diamond is President of Diamond Consultants, Chester, New Jersey, a search firm specializing in recruiting wirehouse and regional firm brokers with trailing 12-month’s production between $200,000 and $5 million. Her firm assists these financial consultants in evaluating opportunities in the industry and introduces them to other wirehouses, regional firms, banks, or independent broker-dealers. Mindy can be reached at 908-879-1002, or mdiamond@diamondrecruiter.com.
Costs
are Down for Custom Functionality on your Web Site. If you have ever revised a business process in order to match your latest proprietary software, then you know the frustration of fitting your nice round business into a neat square hole. It simply does not work. A better fit would be to use custom-designed programming on your web site. Custom functionality, as it is called, allows your web site to reflect your business practices. If you need complex customization on your order page, an off-the-shelf shopping cart may require 50 clicks to allow you to order what you want. A web site with custom functionality should need five. (See a good example of this at http://nausetlanternshop.com/store/frameitem.php?item=49. A web site with custom functionality will direct your businesses' prospective customers to one page where complex choices are available and the order can be completed. These options are available because open source software does not have the limitations of proprietary software. Open source software works beautifully on the Internet. It serves as a bridge between different pieces of software. It adheres to standards that are universally accepted. Open source software has reduced the cost of custom functionality dramatically, from what used to be a minimum expense of $100,000 (more typically three or four times that amount) to between $10,000 and $50,000, within the reach of small and mid-size companies. This software is accessible to LAMP web designers. LAMP is an acronym for web designers who use open source options available on the web including: Linux operating system, the Apache web server, the MySQL database, and PHP programming language. Custom functionality never comes with forced upgrades such as happened to purchasers of Microsoft Word 97. When upgrading the operating system of the computer, Word 97 would not work any more. Custom functionality also has the potential of improving business processes, customer relations, to do lists, file sharing, report sharing, and shopping cart purchases merging seamlessly into your accounting software. Custom functionality is all about profitability. Consider a web design that strategically focuses on how your firm works and how you can become more profitable by attracting and selling your services on the Web. Adapt the technology to work for you, don't adapt your business process to work for the technology. KISS Computing is full-service web strategy firm, providing design, implementation, long term evaluation, and action steps for change that keep web site profitability above $5000 a month for small and mid-size companies. Ross and Amy Lasley KISS Computing, Eastham, Mass., 508-255-9550 x401, ross@kisscomputing.com.
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