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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 High Cost of Negative Volatility: Why Swinging for the Fences Does Not Work Over Time! • Carpe Diem: Be Prepared to Sell When the Opportunity Arises: The Offer and the Price May Not Be Repeated Tomorrow. • The Role of Real Estate in Portfolio Diversification. • So You Don't Have Enough Money to Retire! • As Numbers of Unmarried Couples Increase, PridePlanners LLC™ Association Addresses Their Unique Estate Planning Issues. • Prepare for Contested LTC Claims. • CPAs Can Provide Employee Self Service For their Small Business Clients. • To Build a Profitable, Sustainable Practice, Advisors Need Access to the Qualified Plan Market. The High Cost of Negative Volatility: Why Swinging for the Fences Does Not Work Over Time! Investors who have taken a beating in the market for the last four years are tired of the emotional roller coaster as they watch the market go through good days and bad days, often back to back. The current volatility in the market is not only tough on the emotional comfort zone, it is very costly financially if your investments have lost value and you are waiting for them to recover. When the stock market goes back up, and it will, expect that it will take some time to recover money that has been lost. If you lose 10%, you must gain 11.11% to break even, a loss of 15% requires 17.65% to break even, a loss of 20% requires 25% to break even. Think of it in terms of dollars. If you begin with $100 and lose 20%, you are down to $80. It would take a 25% gain on the remaining $80 to get you back to $100. For frustrated "Buy and Hold" investors, the first 25% of the next bull market will do nothing more than get them back to where they were. Historical studies show that buy and hold investors spend two thirds of their time just working to get even, and one third actually making money. For example, if you held an aggressive fund that could make 20% three out of four years, but you lose 20% in one year, your average annual return drops to 8.6%, less than a fund that routinely only returned 10% a year with no losses.
If you look at compounded annual returns, volatility is even more costly. For example, take two funds whose simple annual return is 10%, the more volatile investment drops to 7.1% return because of the negative effect of a 20% loss during one of the years no matter which year that loss has occurred.
What is the result of $100 invested in a fund that has a 90% growth year followed by a 60% loss?
This does not
produce a 30% gain, but really a 24% loss. ($100 – 24 = $76) PMFM, Inc. Principals are Tim Chapman and Don Beasley, experienced investment advisors 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 assets held by plan participants in their 401(k) plans, as well as for the clients of other asset managers. At PMFM, 100% of employees' 401(k) plan investments are managed in the firm's "growth" portfolio in exactly the same manner as clients. The firm has a lengthy history of good risk-adjusted performance, and has preserved the value of client accounts over the difficult last three years. Tim Chapman, timchapman@pmfm.com, www.401ktoolbox.com, 800-222-7636.
Business owners are often not prepared when an outside offer to purchase comes into the company. Likewise, the offer price is never satisfactory because the owner is invested so emotionally and financially in the business that the tendency is to hang on for a better price. Just as no investor can actually call the top of the market, no business owner can be sure that a second offer will even be forthcoming and certainly the owner cannot predict that the offer will come at a better price. Delaying a sale because the owner does not like the offer, sale price, or has "no identity" outside the business, can have a devastating impact on the sale opportunity. Nothing puts off investors more than ambivalence. A strong and appropriate selling opportunity may not arrive when the owner is ready or when poor health forces a sale. Often, business owners have most, or all, of their capital tied up in their business. One option is a partial sale that structures significant owner participation for a specific period. The cash from the partial sale can then be invested as an appropriate wealth diversification strategy. One sale structure that achieves a gradual departure of the owner is a leveraged Employee Stock Ownership Plan (ESOP) which makes owners out of employees who then tend to be more committed than average employees. The employee owners have purchased equity in the business and will share in its profits going forward, protecting their own retirements. Later, when the rest of the company is for sale, it will be attractive to an outside investor who likes companies with employee owners. The message to the reluctant seller is to "Find something else to do with your time," redeploy your capital, and avoid future business risk that could reduce the value of the business. Interest rate changes, loss of market because of increased competition and technological change are but a few of the many business risks that an owner must consider when an offer to buy his company is on the table and the owner isn't "prepared" to sell. Owners need to deal with the emotions of selling far in advance by developing an exit plan earlier than they would like. Opportunity does not always come knocking, but when it does, a strategy for handling an exit is essential. Patrick J. Horan, CFP™, ChFC, is the founder and managing partner of Horan & Associates Financial Advisors, Ltd., providing asset management and financial planning for executives and closely-held business owners through management of wealth accumulation and wealth preservation with minimal tax consequences. Worth Magazine recognized Horan & Associates in 2001 as one of the “Top 250 Financial Advisers in America” for the third consecutive year. He can be reached at 800-592-7534 or path@horan-associates.com, www.horan-associates.com. The Role of Real Estate in Portfolio Diversification Since the bull market peaked in March 2000, investors have lost roughly $6.0 trillion leaving us all feeling considerably poorer as the wealth effect has evaporated. Though this feeling may be real, and undeniably painful, is our sense of impoverishment justified?? Consider the following: over the past three years, the nation’s housing stock has risen at an average annual rate of roughly 7.0% increasing by a total of — you guessed it — $6.0 trillion. Thus, for many, wealth has simply shifted, rather than evaporated, from stock portfolios back to that old-fashioned asset that our parents relied upon to send us to college and, ultimately, themselves to Florida. Consider also that while the stock market has suffered a number of annual declines over the past 50 years, the nation’s housing market has not experienced a down year since 1948. All of which is not to say that it’s time to eschew stocks and race headlong into real estate. Rather it is to remind us to look at our residential real estate assets with fresh eyes and within the context of a strategic, integrated wealth-building plan. What has happened to housing prices in your neighborhood over the past five years? How much equity has accrued in your primary residence and how can you employ that equity to build wealth? Is purchasing a second home or a rental property in a strong regional real estate market a smart decision? Are you a baby boomer with a son or daughter on the way to college or graduate school? Should you consider buying rather than renting their living quarters? These are vital questions to ponder as you focus on the “now” location of your wealth, appreciate anew the power of diversification, and re-evaluate the role of real estate in your overall portfolio strategy. Paula Chauncey, CFA, Managing Partner of Etre llc, 617-716-0257, headquartered in Boston, MA, works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
So You Don't Have Enough Money to Retire There are other things you can do if you haven't saved enough to retire. You can choose to work longer than age 65. Some of you will have anyway, because an entire cadre of Americans cannot retire on Social Security until 66. (Do you remember those tax cuts several years ago. They were made on the compromise that Social Security would be delayed for those people born between 1943 and 1954. Options include: • The longer you delay taking Social Security Benefits, you will increase your benefits when you do start to collect. • You can look for part-time work in retirement. • You can lower your standard of living or, • You can hope Uncle Fred does have a fortune stashed away for you. Save as much as you can during the years you remain employed. Every little bit will help when you finally do retire. If you are ten years out from retirement, you will need to save $15,000 a year to reach a nest egg of $250,000. That figure zooms up to $60,400 a year to save an investment portfolio worth $1 million.
As Numbers of Unmarried Couples Increase, PridePlanners LLC™ Association Addresses Their Unique Estate Planning Issues It was a normal day until John was hit by a drunk driver on his way home and died. His partner Joann, was the low earner of the two and had moved in with John 15 years ago. They had been together, but unmarried, and lived a very high net worth lifestyle. After John was killed, it was found that his sister was listed as his only beneficiary in a simple will drawn up using a format found in a book nearly 20 years ago. John and Joann had never done any of the financial planning necessary to protect the house for her or provide support should he die. John's sister sold the house, requiring Joann to find a new place to live in the midst of her grief and job hunt at the same time after a fifteen year break from the job market. Because she had given up her low-earner job to accompany John on business trips and to provide a corporate support system for him, her lifestyle changed dramatically for the worse. This hypothetical story rings true to the founding members of PridePlanners™ LLC
Association, an organization for financial advisors, CPAs, and attorneys who
wish to do a better job of representing their non-traditional (unmarried),
gay and lesbian clients. According to census data, in the twelve years from
1990 to 2002, unmarried couples living together has increased 72% representing
22 million Americans. “Protections need to be put in place for unmarried people in long term relationships,” says Sharon Rich, one of the founders of the PridePlanners™ Association. The Association holds meetings and provides online discussion groups,
information archives, and book lists, to help planners better serve
their non-traditional clients. The association’s second
national conference June 13-14, 2003, Provincetown, Mass., visit www.prideplanners.com Prepare for Contested LTC Claims Most of us buy long-term care (LTC) insurance thinking that the policy will pay when the care is needed. Some elders are finding that there may be months or years between when you can no longer stay safely in your own home and when the policy will finally pay. This is a true story: "Maureen" had a good LTC policy paid for by her five children. Her children noticed a marked decline in her ability to take care of herself. She was unable to balance her checkbook and was easily disoriented by simple things - like the doorbell ringing. She complained to neighbors and called the police to report that the man upstairs was making noise to drive her crazy. When no one else heard the noise, she explained that he had her unit bugged so that he was quiet when she had visitors. She agreed to sell her co-op and move into an assisted living facility in July 2003. Her children submitted a claim under her LTC insurance policy, which covers assisted living. The insurer sent someone to administer a basic cognitive test which she passed, according to the insurer. Her claim was denied. Within two months, her physician, a geriatric specialist who is also the director of neuropsychology at a major hospital, completed a lengthy exam involving multiple tests. The diagnosis was cognitive impairment. The doctor wrote in "Maureen's" medical record that it was not safe for her to be living independently. Her LTC insurance policy allows 60 days to elapse before an appeal must be answered. The appeal was denied, requiring another appeal, which the insurance company also got 60 days to answer. As of April 2003, the claim is still not being paid, and under appeal. No reason has yet been given for the declinations. This scenario brings up many important issues about claims paying. But for now let's focus on cash flow. Even assuming good faith on all sides, it's possible to imagine that many seniors will pay for care during their elimination period and during a drawn-out contested claims process. All insured seniors must still have the ability to pay for many months of care (in-home, assisted living, or nursing home) during a contested claim, which may or may not be paid retroactively. Forgetting the necessity of "gap" planning for the time period between needing help and LTC claims payment may mean that some seniors end up on Medicaid - even though they have a LTC insurance policy. Plan now for the assets that will allow you to private pay during the gap period in your LTC coverage. Marilee Driscoll is author of the only long term care planning book to cover all the ways to pay for long-term care, "The Complete Idiot's Guide to Long Term Care Planning" available in bookstores and on Amazon.com now. The book has received enthusiastic and numerous “must reads” from its reviewers. Driscoll is President of the Long Term Care Learning Institute, Plymouth, Mass., speaks to national audiences (both consumer and financial services) on retirement planning and long term care. She also provides technical long term care training to financial advisors & accountants. 508-830-9975 or toll free at 866-MARILEE (866-627-4533), or md@LongTermCareLearning.com
CPAs Can Provide Employee Self Service For their Small Business Clients. Employee Self Service (ESS) Portals are the rage in large corporations. The company web site sets aside an HR, Payroll, and Benefits section, accessible by individual employee pin numbers. The goal is to lighten the load of the Payroll Department for what the industry calls the "what-if" questions that always seem to bog down that department. Such questions as the following are common:
A CPA’s clients and their employees seek answers to the same questions. Why not send them to the CPA’s web site for solutions. Such questions can all be answered by payroll calculators that can be customized for individual corporations OR for CPA firms who want to offer these services to their small business customers. In a small company, the HR/Payroll person may also be the entire Billing Department and simplification and streamlining becomes a mission critical issue. For CPA firms to try to provide answers for small business HR and Benefits questions would be difficult. However, a CPA firm can integrate these calculators on their web site. Data shows that when a web site has a payroll calculator available that it is the most visited page on the site. It is also possible that the connection to the employees through the CPA firm-provided calculators could lead to tax work for individual employees. PaycheckCity.com offers unequalled employee self-service tools for paycheck management. The FREE PERSONALk 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. Over a 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@paycheckcity.com, 480-596-1500 x. 103.
To Build a Profitable, Sustainable Practice, Advisors Need Access to the Qualified Plan Market. Qualified assets are the last, best strategy to build profitable, sustainable practice. Jim Drury, President, BenefitStreet, San Ramon, California, says that advisors should be asking themselves and others "Is there a practical solution for working in the qualified plan segment of the market?" The reasons are obvious. An advisor can increase their assets under management by two times the industry average if they begin to exploit three simple opportunities: (i) Company retirement plans; (ii) IRA rollovers from the executives and employees of those plans; (iii) and the related planning opportunities that rollovers bring to an advisor. 1. The money "sticks" to the advisor. Employee contributions automatically increase plan assets, creating a recurring revenue stream for themselves that grows exponentially every year. 2. An advisor with the goal of converting ten plans a month and 120 plans a year, would have the discretionary income to expand their firm and increase market share within a specific geographic area. The advisor would have the resources required to hire junior advisors creating "super advisor branch offices. 3. By prioritizing the process of closing accounts via a group approach, the advisor increases asset growth two times faster than the one-at-a-time traditional strategy for approaching high net worth investors. 4. Qualified assets under management or long-term money management, establishes a guaranteed asset succession because that money holds its value in the sale of a business or its transition from one advisor to another. Junior advisors can help create a positive succession plan for the principals of the firm. Low adoption of technology by advisors is the most obvious reason why advisors do not have more assets under management, and certainly why they don't have more clients. BenefitStreet's Omnibus 401(k) Technology™ is fundamentally different offering a streamlined, retirement plan administration process, including prospecting, high volume conversion, and enrollment, as well as performance and tax reporting. The BenefitStreet technology makes communication seamless and easy between all essential partners for all types and sizes of plans. To reach Jim Drury, contact Luis Doffo, 925-328-4549, V.P. for Alliances at BenefitStreet, luis_doffo@benefitstreet.com.
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