June
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!
ESTATE PLANNING & INVESTMENTS
• Gift to a Conservation Trust Can Reduce State and Federal Tax and Protect Family Property
in the Future
• When You Think Changing Your Investment Strategy Makes Sense
RETIREMENT
• Working Differently: A necessity for Boomers who have not saved enough to retire
PERSONAL FINANCE
• Consumers Gain Access to Expert Medical Guidance
Thru WorldCare North America
• There are Only Five Basic Elements A Consumer Needs to Know About Long Term Care
Insurance Policy Design
• Children Need to Learn About Financial Choices.
Mistakes are an important part of the process.
401(k) STRATEGIES
• Low Utilization of Online Advice Services Drives Plan Sponsors to
Look for One-On-One Advice for 401(k) Participants
ESTATE PLANNING & INVESTMENTS
Gift to a Conservation Trust Can Reduce State and Federal Tax and
Protect Family Property in the Future
The 90-year old patriarch of a large family owns a significant chunk of a highly desirable and expensive island off of the New England coast. He has not done any estate planning to lessen the impact of the value of the land (that could be carved into 50 building lots) will have on his five children. It may be because he is sharp and not focusing on dying. It may be because he does not understand that a first step of simply changing the title of his 100 acres to a revocable trust can keep his estate out of a lot of trouble. Without the trust, his estate will go into probate and his children will be required to sell the land currently valued at $1.7 million, to developers to pay the estate taxes which will be half of that value.
No one in the family wants to see the land developed. Earlier, Dad had deeded a large number of acres to a conservation trust and the same trust has come back with another offer for more acreage. What the family did not know until they talked with a financial advisor with experience in managing highly appreciated real estate was that the family could negotiate with the Conservation Trust. The Trust had offered $1.4 million for the 100 acres.
Here is what the advisor recommended:
- Immediately set up a revocable trust and title all of the acreage to the trust to avoid probate.
- Begin negotiations with the Conservation Trust. Instead of accepting an offer of $1.4 million for 100 acres, offer a conservation easement on 50 acres for $700,000.
- Create five 5-acre lots for each of the five children to inherit. The family also retains 25 acres of open space.
- Allow the conservation trust to buy the building rights only for 50 acres for half of what the Trust originally had offered -- $700,000. Putting a conservation easement on the property such as the sale of building rights will drop its value to about $1.4 million. All of the land stays in the family, but it has a lower value and 50 acres cannot be developed. This plan reduces death taxes and enhances the value of the property retained by the family.
- The sale price to the Conservation Trust of $700.000 is subject to a capital gains tax, leaving almost $600,000 after tax for Dad’s health care at home for the rest of his life.
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
When You Think Changing Your Investment Strategy Makes Sense
Any significant moves on the part of the market may cause us to consider making irrational decisions. To soften the angst that the market's rise and fall can cause. Let's review actions you should, and should not, take during a market correction.
A Correction is Scary
A correction is widely assumed to be a 10% decline in the stock market and they can and should occur on a fairly regular basis (once every few years , or more often if the market rises quickly ). Emotional investors view a correction as a reason to panic and make a change to their portfolio.
Antidote - if a correction in the market causes your overall allocation to move by 3 - 5%, it is wise to rebalance back to your target allocation. This means selling stocks that did not drop and buying stocks that did.
When a Sector Drops
In a diversified portfolio, at any given time one or more components of a portfolio may be dropping while others are rising. Non-correlation, the basis for diversification, suggests that an investor would want some investments to be moving in a direction opposite other investments in a portfolio. However, emotional investors might panic when emerging markets drop 26%, making the possibly erroneous assumption that this sector's drop means the entire market is either correcting or the market is going into a bear market.
Antidote - if one or two asset classes are down significantly, consider harvesting a tax loss by swapping into a different investment within the same asset class. While doing so, bring your allocation to that asset class back up to your target allocation by buying slightly more of it.
Buying Unemotionally
You may want to buy stocks which have gone up. Emotional investors who are adding money to their portfolio routinely ask if they should add their cash to those asset classes that have recently treated them well. For instance, there tends to be a strong desire to buy more REIT's now, after six years of double digit returns. In reality, an unemotional investor would buy the investment that has gone down most recently - bonds, or the investment which has gone up the least - large company US stocks.
Antidote - A consistent discipline of rebalancing will remove emotions from your investing decisions. A true, disciplined effort to rebalance will actually suggest that you sell some of what has gone up recently and buy more of what has gone down. It's not easy to do, but in the long run it will increase the returns in your portfolio.
Pay Attention to Liquidity
Making a decision to leave the equity markets for the real estate markets. Investors, particularly in areas where real estate growth has been very strong, believe that the real estate markets are not as volatile as the stock market and the y choose to sell their liquid investments to buy more real estate. The downside is that such investors tend to buy more real estate near where they live, so they are not diversified geographically. Also, they are giving up liquidity for a much less liquid asset. Many tend to believe that they will be able to "flip" their real estate if they need the cash, which may not be true should there be any sort of correction in the real estate market. With interest rates rising, the cost to borrow is higher, which means the cost to hold leveraged real estate is higher. Real estate is volatile, though this is difficult to recognize because it is not priced daily.
Antidote - Real estate should not be viewed as a "safe" place to put money,
but should be seen as another long-term investment which can compliment
a well-diversified liquid portfolio. Ensure that you build a diversified portfolio which includes both liquid assets and real estate. The first real estate an investor should purchase is generally their residence - a "use" asset. A liquid portfolio diversified into stocks and bonds of many types will provide the best long-term returns, but the trade-off is volatility.
Depending on the size of one's net worth, investment real estate can play an important role in an overall portfolio, but should probably not be the largest part of a portfolio. The proportion will depend greatly on the amount of wealth an individual has acquired. Creating a long-term financial plan will help determine an investor's sources for retirement income and drive the overall allocation decision.
Letting the Markets Determine Investment Strategy
To plan an investing strategy dependent on short term market moves is folly. It is always a bad idea. Investment strategy should be determined before investing and should be long-term in nature. The only impact of movement in the market should be rebalancing a portfolio back to target allocations. Investors should not make major adjustments or changes to their portfolio based on a market decline (or rise). Selling an investment because it is dropping in price is a purely emotional decision.
Antidote - The antidote to protect you from making bad investment decisions is almost always "rebalancing". Sell high – buy low - on a regular basis.
Jennifer Ellison, 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. jennifer.ellison@bosinvest.com or 650-462-8666
RETIREMENT
Working Differently: A necessity for Boomers who have not saved enough to retire.
The research is specific and daunting. Boomers do not have enough saved to spend a "traditional" retirement golfing and visiting the grandchildren. Boomers are redefining what retirement will look like and a good part of that definition will be include the flexibility to develop a portfolio of work, mostly paid, designed and built in a new way that fits both their retirement desires and their personal and financial needs.
Staying put in your current work is a possibility. A number of workplaces simply do not have enough younger workers to take the place of retirement age Boomers. Remaining at your work, but tweaking your responsibilities so you can reshape your life while still being useful to your company is key.
Flexible hours, phased retirement and re-negotiating full-time work is becoming more prevalent. A recent study shows that 20 percent of companies are willing to consider alternate arrangements for their employees. This percentage is growing and must keep growing. More governmental agencies, universities, and non-profit organizations are realizing that they need to preserve the skills and knowledge of their older workers, and to do that they will have to offer them creative incentives for staying.
Workers may need to become the trailblazers in their workplace, the one who clears the way for other like-minded, mature employees who want to stay put, but work differently. For instance, Audrey wanted to cut back hours and spend more time volunteering to teach computer skills to children. Her company was considering a community outreach coordinator. She changed jobs within her company, kept her paycheck and benefits, and is now in a role she loves.
Learn the ropes
Investigate your company's policies, including those that affect pension plans and related benefits. If the existing infrastructure is not set up for the kind of creative arrangement you need, don't give up. Policies can be changed and updated, and often are. It may be up to you to propose the change.
Need to know
Formulate your "Working Differently" proposal before talking about it at work. Choose your first listeners carefully, thinking strategically about who to tell and how to promote your ideas. Enlist the key people without going over anyone's head.
What works for them
Think how your proposal can benefit your company and have research that backs up your plan. If you are hoping to create or expand a training program, get solid numbers on how many entry-level employees there are and how much overtime supervisors already work. If you see a niche in sales or marketing, formulate a plan that will enhance or support the company's existing efforts, without criticizing the current department.
Do your own PR
Remember the importance of perception -- never say that you want to cut back, or that you have less energy for travel, long hours, or multiple projects. Instead, play up the challenges you are seeking and the opportunities you envision.
Put it in writing
Prepare a piece with talking points that promotes your knowledge and expertise: a resume, a list of accomplishments, and/or a visual portfolio. A brief biography can be a useful tool, allowing you to highlight your relevant abilities and experience, while de-emphasizing less pertinent information.
Give the idea time to percolate
Let the change process unfold. Plant the idea and seek input. Keep an open mind and listen carefully so you can learn how to sell your idea. Revise your plan in light of new information.
Sell it as a win/win
Emphasize the benefits of your idea to your company. How it will mean one less hire for the company. How it will give the firm an advantage over a competitor. How it will best work for you.
If you are not successful, do not despair
You have planted an idea that you need new challenges and are open to further challenges. As more employees express interest on working differently, it is likely that your organization will adapt.
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
PERSONAL FINANCE
Consumers Gain Access to Expert Medical Guidance
Thru WorldCare North America
WorldCare North America, a newly formed medical services provider, can now provide U.S. and Canadian consumers with WorldCare Inc.’s international medical diagnosis and treatment recommendation service. The new company offers consumers an affordable and easily accessible information and advice service they can turn to when faced with critical medical decisions. Significantly, the service is completely independent of a consumer’s health insurance coverage.
WorldCare North America, unlike any medical service in the market, provides consumers with the information, best medical practices, access and choice that will allow them to take control of their treatment options. At a time when advancements in healthcare are accelerating exponentially, it is critical for consumers to have access to all the latest diagnostic and treatment advancements, says Ron Mastrogiovanni, WorldCare North America’s President and CEO.
“This medical service offers independent medical guidance and the ability to control healthcare decisions, and can provide added value for customers of banks, credit card companies, insurance companies and employee benefit providers who pass on these services to their constituencies, says Mastrogiovanni.
WorldCare, Inc. was founded in 1992 by a team of internationally-renowned physicians at Massachusetts General Hospital. The company was among the first to deliver highly specialized electronic medical opinions from the best medical centers in North America for the benefit of patients in other parts of the world. Their proprietary technology is FDA-cleared and HIPAA-compliant as a method of transmitting diagnostic and imaging text electronically. WorldCare provides more than three million consumers with access to top physicians, cutting edge medical practices and best medical advice.
WorldCare Consults are provided by leading teams of physicians at internationally-renowned hospitals, all ranked in U.S. News and World Report’s list of America’s Best Hospitals. The service has no insurance restrictions or geographic constraints and WorldCare Consults are provided within four business days. For more information go to http://www.worldcarena.com.
WorldCare North America will provide services to consumers through resellers. By leveraging the existing infrastructure of WorldCare Inc., WorldCare North America is able to offer institutions access to affordable expert medical guidance.
Mr. Mastrogiovanni brings more than 25 years of institutional marketing and sales to his new company, including 12 years leading the institutional marketing strategy for FundQuest a managed account platform company. “Ron’s wealth of knowledge and experience working with a variety of distribution channels, specifically within the financial services industry, will drive the availability of WorldCare’s valuable medical service to consumers in North America and Canada, says Hassan Sharif, MD, chief medical officer, WorldCare, Inc.
To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America
Cambridge, Mass., 617-250-5167 or e-mail jflynn@worldcarena.com.
There are Only Five Basic Elements A Consumer Needs to Know About Long Term Care Insurance Policy Design
There are only five basic elements to understand when you consider the purchase of a long term care insurance policy. These elements will help consumers design a policy that provides meaningful protection, whether they need care and make a claim soon after purchase or decades in the future.
#1 Daily Benefit
The daily benefit is the limit that the policy will guarantee to pay you for covered services once your claim is approved. Most insurance companies define the value of a LTC insurance policy by multiplying the daily facility benefit by the number of days in the benefit period. A policy with a $200 daily facility benefit, and a three-year benefit period (3 years x 365 days = 1,095 days), is worth $200 x 1,095, or $219,000. This is often called the pool of money.
#2 Inflation Protection
Today's cost of care is only a benchmark, because the cost of care will inevitably increase. Purchasing a policy with inflation protection is, therefore, very important. Baby boomers may not make a claim against their LTC insurance benefits for 30 years. Five percent compound inflation protection is the best inflation protection available, and is highly recommended. A policyholder must self-insure (pay for) any shortfall between an insurance policy’s benefit and the actual care cost.
#3 Elimination Period
The elimination period is similar to a deductible; it's the number of days before the policy starts paying a benefit.
#4 Benefit Period
The benefit period is the number of years that the policy will pay, once the elimination period has been satisfied.
#5 Return of Premium
What happens when LTC insurance premiums are paid for years, and a policy is never used? You can purchase a policy with a return of premium provision. Return of premium terms vary among contracts. A traditional return of premium rider refunds, at death, total premiums less claims, and some return premium regardless of claims. Knowing that premium payments can be refunded is reassuring to many consumers.
The purchase of LTC insurance involves buying a pool of money to pay for long term care. Don't get distracted. Focus on the five decisions above to design a policy that meets your needs and circumstances. For more information, go to www.securityadvantageltc.com.
Republic Marketing Group, Inc., of New Braunfels, TX, is the national marketing organization for Security Advantage™ long term care insurance. This policy has two valuable riders. The Maximum Lifetime Benefit Accelerated Rider (called the "Acceleration Rider") offers younger claimants, with less-than-lifetime benefit periods, immediate access to the inflation-adjusted amount of money the policy would be worth at age 85. The Return of Premium Rider gives policyholders the choice to either: cancel the policy before age 75, and receive premium dollars, net of any claims paid, back; or keep the policy, adding their premiums paid to their benefit pool.
Agents may get more information on Security Advantage™ Long Term Care Insurance by calling 20+ year LTCI industry veterans Ron 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®.
Children Need to Learn About Financial Choices.
Mistakes are an important part of the process.
When a child is very young, boundaries about how he or she can use their money must be very clear. In elementary and early middle school, the acceptable uses can be more broadly defined. It is high school where you will find out if the foundation you have laid with money means that you will only have to respond to specific situations.
Empower your child around money. Even before the money hits his pocket, make certain you discuss what he can use the money to buy and be as specific as possible.
1. Talk to him about “his” money, not just about money you gave him.
2. Hammer home the point that “his” money cannot be used for anything that you will not allow.
3. Be clear about the consequences if he buys something on the “not allowed” list. Sometimes you can customize this nuance. You may take the forbidden item from him and not reimburse him for it, or your circumstances might allow him to return the item if it is in returnable condition.
4. Make it clear he is always welcome to check on whether a purchase is appropriate. This may seem like micro managing, but as your child gets comfortable with what he is or is not allowed to use “his” money for, he’ll phase you out of the purchase approval mode.
Latitude usually means that mistakes will be made. Discipline yourself. Bailing a child out if they make poor choices during their financial education is not the answer. Children must face the outcome of poor decisions. Perhaps it is a magazine subscription that just keeps coming and coming along with the bills. Make your child deal with it; write a letter stopping the subscription, reporting the publisher to the Better Business Bureau, returning the magazines. But don’t do it for him. Lessons are more likely learned if the student is taking the necessary action steps, not the teacher. Don’t offer to replace or pay for a cheap toy that is broken within days.
The consequence lessons are much less expensive now when your child is young than when he is an adult buying high dollar items like cars or a house. Learning the lesson in a hard way when he is young is much less expensive than making the same mistakes later in life. Note: your child can make a valid decision that does not match decisions you would make, opting for trendy sneakers but only one pair when he really needs two.
The difficult lesson for parents is the knowledge that you cannot save your child from himself. We all must learn to make our own financial decisions and then live with it. A good foundation must be taught.
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.
401(K) STRATEGIES
Low Utilization of Online Advice Services Drives Plan Sponsors to Look for One-On-One Advice for 401(k) Participants Thoughtful benefits managers of organizations both large and small have little confidence that their employees are using the very robust and interactive retirement planning tools most 401(k) plan providers make available to plan participants.
"The utilization rate of online planning tools is very low," says Emily Talley, Benefits Specialist at Tanner Health System, based in Carrollton, Georgia, an organization made up of three hospitals and several multi-physician practices in west Georgia, with an employee group that is largely female.
Tanner signs employees up automatically with a 2% deferral. Talley frequently hears from employees who admit they have been meaning to increase their deferrals, but simply have not gotten it done.
"We have been looking for someone to come in and speak one-on-one with our employees for a long time. However, in the past, objectivity was hard to find - most firms offering one-on-one wanted the opportunity to offer insurance or other services as well," she says.
"We do not want product representatives to solicit our employees." Talley says. As a result of the low utilization of online planning tools, benefits managers directors like Talley are now looking for one-on-one financial advisor/plan participant meeting options from an advice provider in the hopes that a personal meeting will jolt their employees out of complacency about their retirement savings.
Tanner recently chose 401(k) Toolbox as the objective advice provider for its 1,900 employees. 401k Toolbox offers two levels of service:
• "Manage-it-for-Me" allows employees to become discretionary clients of an investment management firm (PMFM, Inc., founder of 401k Toolbox) offering conservative active and passive asset allocation.
• "Do-it-Yourself" service provides the more investment savvy do-it-yourselfers with a regularly updated review of the markets, and an independent review of the investment options available in the plan utilizing 401k Toolbox's proprietary ranking system, as well as strategic asset allocation portfolios.
In the one-on-one meetings, the financial advisor uses a proprietary, interactive, web-based planning tool that allows the employee to offer as much information about their financial situation as they wish. The advisor can very quickly tell them if they are, or are not, on track for a secure retirement. "Even if our employees do not choose to have their assets managed for them, they can sign up for the one-on-one meeting," says Talley. She plans to set up a benefits staff table outside the one-on-one meeting rooms so that employees can go online immediately to increase their deferrals and implement investment recommendations, if they so choose.
"The ability of an advice provider to deliver one-on-one meetings that change the way plan participants save for retirement will become the most important differentiating factor in serving the needs of plan sponsors in the near future," says Tim McCabe, Vice President, Marketing, PMFM, Inc. Plan sponsors know they are going to be held accountable for the success of their 401(k) plans. Recognition of low participation rates and low utilization of advice tools by employees will fuel the growth of one-on-one meetings. Firms such as 401k Toolbox who can deliver objective advice will beat the forefront in providing services that 401(k) plan participants have always needed.
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 or Tim.McCabe@pmfm.com
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