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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! • This is a Weird Year for Paychecks: Most Employers are Planning to Give Bi-Weekly, Salaried Employees an Extra Paycheck: Calculators at http://www.paycheckcity.com can Model Extra Net Pay. • Options for Using Assets Tied Up in Your Home. • Sharing Retirement Savings at the Time of Divorce. INVESTMENTS AND WEALTH MANAGEMENT • Innovative Portfolio Managers are using Exchange Traded Funds (ETFs) Flexibility to Build Portfolios. • What Will Happen When the Economy No Longer Has the Administration's Pre-Election Support? • Gauging
the Growth of Your Personal Economy is the • Bank
Trust Departments Find Bank's Own Broker/Dealers •Brokers
with Hybrid Books of Business -- Both Retail and • Media: Sign Up for Free Subscription to In-Depth, Financial Education Resources. • Long-term
Care Insurance Design Secret:
This is a Weird Year for Paychecks: Most Employers are Planning to Give Bi-Weekly, Salaried Employees an Extra Paycheck for the Weird Year: Calculators at http://www.paycheckcity.com can Model Extra Net Pay. 2004 is a weird year when it comes to paychecks. Every dozen of years or so, the Roman calendar adjusts by adding an extra Thursday and Friday. This requires some adjustment in a company's paycheck policy. There are two ways to handle this: Dock the Paychecks All Year and Kill Morale: Announce an Extra Paycheck and Be the Hero: Industry experts say companies should not be tightwads on this matter, because the extra week also reflects extra revenue for the company. The "Hero" approach increases an employee's annual salary for the year, but only for 2004. The alternative is to damage salaried employee moral by reducing each paycheck. Employers and employees can use the "Weird Year" calculator at http://www.paycheckcity.com to model their net pay under these circumstances. If unsure of your company policy on this matter, contact your payroll department. PaycheckCity.com offers unequalled employee self-service tools for paycheck management. The FREE PERSONAL FINANCE CALCULATORS at this site are used by individuals and organizations of every size to quickly and accurately answer paycheck-related questions and to compute paychecks under a variety of circumstances. More than 1.5 million page views take place each month on the PaycheckCity.com site and visitors stay an average of 10 minutes each. It is the most visited site for payroll-related support on the Internet. Contact Jon Bohnert, jon@symmetry.com, 480-596-1500 x. 103.
Sharing Retirement Savings at the Time of Divorce. A financial planner on the divorce strategy team is essential to evaluate the scenarios represented by opposing counsel as to the future financial viability of the divorcing spouses. The higher earning spouse will find that their retirement assets come immediately into play as an asset pool of interest to the other spouse during divorce negotiations. The division of these assets will be part of any final divorce decree. It is important to remember that no matter what the divorce decree says, if a spouse is expecting a share of a partner’s retirement assets, their attorney must follow through after the divorce by filing a Qualified Domestic Relations Order (QDRO) with the court and then submitting it for approval to the spouse’s company. It is the company’s approval, NOT the court’s or judge’s that determines when and if the spouse will get those retirement assets. Plus, if a spouse retires, remarries or dies before the QDRO is drafted (and approved by the company), the agreement that a spouse reaches relative to the retirement account division in the divorce may be unenforceable. Equally important to the actual drafting of the order is making sure it gets approved by the company. It can take months for the company to decide if a QDRO meets federal regulations as well as each company’s own unique requirements. Do not underestimate the time or attention that a QDRO requires from the attorney, the client and the financial advisor. A financial advisor can run various scenarios to help a client decide which of a number of negotiating stances need to be considered. Life insurance on the higher earning spouse should be considered as spousal support replacement. If the divorce involves an older woman, re-employment is questionable because of experience or health. Sophisticated financial projections from the opposing spouse showing an apparently equal division of property can leave the lower, or non-earning spouse, destitute within a few years. Divorcing men and women simply do not have equal income-producing potential. The older woman is often without substantial skills and experience and will require a greater share of the property to cushion the income loss she suffers at divorce. The goal is to provide the older homemaker with equal standards of living after the divorce. Donald W. Nicholson, Donald W. Nicholson & Associates, Ltd., Wilmington, Delaware, is a fee-based financial planning firm serving the retirement and wealth management needs of professionals and business owners for almost 30 years. His son, Donald W. Nicholson, Jr., is a partner in the business. Contact them at 302-529-1500. E-mail dwnicholson@unitedplanners.com -- http://www.nicholson-associates.com. Options for Using Assets Tied Up in Your Home. You have just retired and discovered that you need an additional $700/month to supplement your income and fund living expenses. Your home is worth $400,000; and has no existing mortgage and you have investment assets of $250,000. To use the assets represented by your home’s value, your options include reverse mortgages, interest-only mortgages, and home equity lines. A REVERSE MORTGAGE allows seniors to access the equity in their home without having to make mortgage payments, qualify for a mortgage under traditional income and credit underwriting guidelines, or give up title to their home. With the most commonly understood method, the homeowner can get a lump sum amount of money at closing (similar to a traditional cash-out refinance). In this case, the interest payment on the funds are “deferred” and added on to the loan balance. Even if the interest is accrued to the point where the balance on the mortgage exceeds the value of the home, the homeowner retains title to the property and is never obligated to make a mortgage payment in their lifetime. If the homeowner sells the property, the mortgage must be paid off. Otherwise, once the last surviving spouse dies, the title to the property is transferred to the estate and the estate must repay the remaining balance on the mortgage to the mortgage lender. Reverse mortgages can also result in credit lines and monthly advances. Hefty fees and closing costs are the major drawback of a reverse mortgage. In this example, the client would be subject to about $11,000 in up-front fees and closing costs (not out of pocket, but rolled into the loan amount), and an additional $5,000 in “service fees” throughout the life of the loan. The interest rate on a reverse mortgage is variable; with current rates in the 3.3% range (2% above the yields on one-year Treasury bills). An INTEREST-ONLY ARM MORTGAGE allows the homeowner to take a lump sum amount of money, place the funds into an investment account and draw on the investment account to make the monthly mortgage payment and provide the additional $700 in monthly income that is needed. The interest rate on the mortgage would be variable at 3.25% (2% above the LIBOR index), and the closing costs would run approx. $4,500. Assuming the initial loan amount is $200,000, and the return on investment is at least 1% above the mortgage rate (4.25%), the funds should last for 19 years, or until the client is 84 years old (at which time the client could refinance and repeat this strategy). In this scenario, the client would save approx. $11,500 in service fees, points and closing costs when compared with a reverse mortgage. However, the client would need a good credit rating to qualify for this strategy, unlike a reverse mortgage that doesn’t evaluate credit history as a qualifying factor. Also, if the client had no investment assets beyond their home, and no other source of income, the variable interest rate would probably be in the 4% range (2.75% above the yields on one year Treasury notes). This homeowner choosing a HOME EQUITY LINE OF CREDIT of $200,000 pays little or nothing in fees or closing costs, but their variable interest rate would be tied to the Prime rate (currently 4%). Conceptually, and assuming the Prime rate remains 4% for the life of the loan, the client could draw $700/month from this line of credit for up to 16.5 years. However, the chance of the Prime rate staying at 4% for 16.5 years is highly unlikely. The likely scenario is that the funds would last for 13-15 years (until the client is 78-80 years old), assuming a credit limit of $200,000. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a full service mortgage lender and broker in Ann Arbor, MI. Phone: 888-608-9800 Email:Gibran@NicholasCity.com Web Site: NicholasCity.com
INVESTMENTS AND WEALTH MANAGEMENT Innovative Portfolio Managers are using Exchange Traded Funds (ETFs) Flexibility to Build Portfolios. Advisors may be missing the boat if they haven't looked into ETFs for asset allocation applications. Some mutual fund managers now use ETFs as a way of handling idle cash, particularly if they must stay fully invested. These managers can invest in SPDRS, and take a position in the S&P index for quick placement of new money. But usually the managers will not hold these ETFs long term. Those advisors practicing strategic asset allocation, creating diversified portfolios, are using ETFs for certain market sectors because of the low cost, efficiency, and the ease of implementation. Tactical asset allocation specialists use ETFs to concentrate in asset classes that are performing well, and avoid asset classes out of favor. The ETFs make trading in and out of a sector seamless, convenient, and offers liquidity that is simply not available in other vehicles like mutual funds. Equally important, ETFs are clean from a regulatory standpoint. Like stocks, they can be traded intra-day and are not subject to the same regulations that are now likely to limit mutual fund liquidity. ETFs are here to stay. It's important for all investment advisors to evaluate their place in client portfolios. PMFM, Inc. principals are Tim Chapman and Don Beasley, with offices just outside Athens, Georgia. Jud Doherty, CFA, manages the marketing and distribution of 401k Toolbox, a service that provides discretionary management as part of its advice product. PMFM provides money management services for its own clients, for the asset held by plan participants in their 401(k) plans, as well as for the clients of other asset managers. The firm has always offered a tactical asset allocation strategy and has a lengthy history of good risk-adjusted performance, preserving the value of client accounts over the difficult last four years. Tim Chapman, 800-222-7636, timchapman@pmfm.com, www.401ktoolbox.com
What Will Happen When the Economy No Longer Has the Administration's Pre-Election Support? Election years are always good stock market years, as the incumbent administration works diligently to prop up the economy before the November elections. Nonetheless, the realities are that the U.S. economy is faced with an enormous past deficit, enormous current national budget imbalance, and dependence on foreign purchase of U.S. Treasury bonds. In the last bond offering, 45% of the available bonds were purchased by foreign entities. Investors need a plan if the post-election economy does not meet expectations and the U.S. does not remain a favorable place for foreign investment. Under this scenario, interest rates can only go up. High interest rates will put a significant drag on the equity and bond markets at the same time. Look for investment advisers who are searching now for investments that will protect investors under a post-election scenario. Your advisers should be looking at alternative investments. These non-traditional choices may include gold, mortgage REITS, energy and commodities. All investments have their dangers and all have their rewards. In the turbulent, post-election, times ahead, be aware of your options. Henry I. Montgomery, CFP -- 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. pfshim@usinternet.com.
Gauging the Growth of Your Personal Economy is Key to Creating Wealth Land, labor, and capital — these are the things of which dreams are made — at least according to Adam Smith in his groundbreaking treatise, The Wealth of Nations. In Wealth, Mr. Smith identifies these elements as the sole means of production and thus, the sine qua non for building the wealth of a nation state. He goes on to point out that the economic well-being of a nation state is a direct outgrowth of the manner in which these elements of production are employed. Yawn, you say. Economics 101, you say. But step back for a moment and extrapolate Smith’s notion to your personal situation. As our own nation states, each of us generates wealth through the elements of land (loosely translated as your residential real estate), labor (the skills you ply in the marketplace) and capital (the disposable income you set aside and convert to capital through wise investing). And, if we’re smart about it, we focus on increasing the productive capacity of our land and our capital, and decreasing the reliance on the productive capacity of our labor. The result — more free time and more bandwidth to pursue the broad array of interests that lights our fires. As you approach tax time and engage in financial forensics of the year gone by, try a little exercise. Take a blank sheet of paper and calculate the return on your three elements of production: land (how much did your home increase in value over the past year based on comparable property sales in the neighborhood?); labor (what did your job yield in wealth creation last year?) and capital (how did your portfolio perform and remember, net of costs and inflation!) and see how your personal economy fared. Then, consider what changes you could make in 2004 to increase your personal GDP and shift its reliance from limited sources (i.e., labor) to unlimited sources (i.e., land and capital). Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
Bank Trust
Departments Find Bank's Own Broker/Dealers It is the bank's broker dealer side, not the trust departments, that now offer programs widely considered more "defensible" in addressing a high-net worth client's short- and long-term investment needs. This is fueling interest by bank trust departments in the value proposition of separate account platforms. Consider these differences: · Generalists vs. Specialists: Most traditional bank trust models offer a generalist approach with an approved, but limited, stock list (to avoid conflict of interest with the bank's loan portfolio) to investment management clients. A separate account platform offers clients specialist teams from multiple boutique investment management firms. This makes it possible for brokerage divisions to have a widely and well-diversified portfolio since each separate account manager is paid to know as much as possible about a very narrow aspect of the market. This also plays out in the economic commentary and market outlook that comes from a variety of specialty managers in the brokerage model, compared to the standard, generic viewpoint of the trust model. · Manager Monitoring and Surveillance: Separate account platform providers monitor and measure separate account managers to ensure continued performance and adherence to the investment model for which they were hired. The separate account platform provider has no personal relationship with the recommended separate account managers and can terminate under-performers at will. It is unlikely that trust departments would ever terminate themselves if they were under-performing. · Technology: Technology has changed the face of how high-net worth monies are being managed today. Formerly an individual investor needed $10-$20 million to access an appropriate number of specialty managers for diversification. · Now, given that technology has reduced the cost of administration, manager minimums are, on average, around $100,000 per style. Bottom line, for bank trust departments to remain competitive, the adoption of a separate account platform seems inevitable. To reach Brian Carroll, Head of Separate Accounts, FundQuest, Boston, call Joanna Flynn at 617-526-7307. FundQuest is the leading provider of customized Web-based managed account platforms for financial institutions interested in moving their representatives from commission-based to fee-based product sales. jflynn@fundquest.com. Brokers with
Hybrid Books of Business -- Both Retail and Institutional -- In the past, retail brokers who had a percentage of their book of business with institutional clients have been allowed to service them on a retail platform with a payout that was substantially higher. But at the large firms, that trend has changed. New broker/dealer policies make it impossible for some wirehouse brokers who have a hybrid book to stay at their present firm as well as move to another wirehouse. Brokers in this situation must choose between their retail or institutional business, give up one segment of their client base resulting in a lower payout, or leave their firm in order to keep their clients. Leaving the firm brings up the issue of where to go. Large "brand name" broker dealers are not looking at brokers with hybrid books. If the broker dealers do look at "hybrid-book" brokers, they would require the moving broker to give up the institutional accounts, as the new BD would already have brokers covering those same accounts. Brokers in this situation must put their allegiance to big name firms under scrutiny. Seldom is the marquee value of a big name firm the reason for a broker's success -- they just think it is. Hybrid-book brokers will find their style is better suited at a boutique firm where there is unlikely to be account duplication. The boutique firm offers a better quality of work life, more flexibility in how they conduct their business, and very often, better payouts. Hybrid brokers are unaware of how good life can be at boutique firms and often turn their noses up at such opportunities. The likely lack of account duplication, allowing the moving broker to keep their institutional clients, may make all the difference. 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.
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Long-term Care Insurance Design Secret: Overbuying Daily Benefit Is Excellent Strategy. Consumers buying long-term care insurance tend to focus on one aspect of policy design - the benefit period*. Instead, they should focus on the daily benefit**. It's almost always a good idea to buy a higher daily benefit than perhaps they think they need, even if it means buying a shorter benefit period than they want. Here's why: Inflation hedge: About half of all policies are bought without inflation protection. This is a huge design flaw, as the average purchase age is now under 60, and most people on claim are between ages 80-90. But, even among purchasers who buy inflation protection, this protection may fall short. Why? Policies offer only a 5% inflation rate, which may not be high enough. Overbuying the daily benefit today further protects consumers against the ravages of long-term care inflation. Preserving assets: Consumers are most likely to collect more with a higher daily benefit, even if their benefit period is shorter. For example, a policyholder has a heart attack, followed by a stroke. She receives a year of long-term care insurance benefits, then dies. In this case, it didn't matter if her benefit period was two years or lifetime (unlimited). She was only collecting for one year. A higher daily benefit reduces or eliminates any out-of-pocket expenses during a claim, preserving assets and income. If consumers are nervous about a short benefit period, and fear they will end up having a long-term care claim that goes on for years, they need to know a mitigating fact: any unused portion of the daily benefit is not lost – it extends the benefit period. For example, a $200 daily benefit/three-year benefit period policy, covering daily care costs of $100, will last six years. The $100 dollar unused portion of the daily benefit is not lost - it waited for the policyholder resulting in a three-year benefit period policy actually paying out for six years. Marilee Driscoll, President, Long Term Care Learning Institute, (508) 641-9393, Plymouth, Mass., the leading, objective authority on long term care financing, and author of "The Complete Idiot's Guide to Long Term Care Planning.”
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