May 2007
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!
INVESTMENTS
• The Incredible Shrinking Stock Market: It’s a Good Thing.
• Jack Bowers and Fidelity Monitor Newsletter Post a Stunning Twenty-Year Record: Bowers is exclusive strategist for Weber Asset Management.
• Create a Plan to Liquidate Restricted Stock on a Favorable Timetable The One-Pony Portfolio is Dangerous No Matter Your Age
401(k) INDUSTRY
• Target Date Funds Pale in Face of Managed Accounts in 401(k) Plans
ESTATE PLANNING & RETIREMENT
• When Early Retirement Financial Options Are Confusing and Intimidating -- Too many choices in how to take retirement income increase your opportunity for mistakes.
• Coordinated Team Essential to Implement Financial Strategy
• Five Easy Pieces: Is Your Investment Advisor On Your Page?
• 529 Plans Can Provide Excellent Funding for a Child’s College Education, but Generous Grandparents Should Know The Impact on Their Estate Planning
PRACTICE MANAGEMENT
• Customized Financial Plan Can Now Include Suggested Investments to Fund Retirement Healthcare Costs
INVESTMENTS
The Incredible Shrinking Stock Market: It’s a Good Thing.
We are in the midst of frenzied era of stock market shrinkage. The financial press is filled daily with stories, rumors and announcements about mergers, acquisitions, leveraged buyouts, and stock buybacks. The numbers are beginning to reach truly astonishing levels. Recent data indicate that the U.S. stock market is on track to shrink by 4.3% by year end. This is a pace double that of 2006, which was itself a record year. There are a number of different ways to slice and dice this data, but the conclusions are all the same: the level of market shrinkage we are seeing is several times greater than that seen in the last bull market of 1995-1999. It is unprecedented, energizing, and hugely profitable for many. So, of course, many pundits hate it. As Robert Frost might have observed, (had he worked for CNBC) “Something there is that doesn’t like a stock market frenzy.”
Whenever money seems to be made a bit too easily, we always hear from the skeptical pundits who intone that we are seeing a mania like that of the 1990’s, and that “this, too, will end badly.” Well, maybe. I am of the belief, though, that only fools, columnists, and brokerage house strategists persist in believing that they can accurately see years into the future. So I’ll take no bets on what the market will look like in 2009. But I do know this: anyone who is equating the IPO frenzy of the 1990’s with the LBO/M&A frenzy of today has an inside track on this years’ ‘Wrong Way Corrigan’ award. In fact, what we are experiencing with today’s incredible shrinking stock market is the exact opposite of what we lived through during the melt-up of the last bull market.
Seasoned observers will testify that at market extremes the ‘smart, sophisticated money’ takes advantage of the ‘naïve, credulous money.’ And so we saw in the IPO boom of the 1990’s newly minted dotcoms and marginal spin-offs floated on little more that hope and hype. Millionaires were created on the corporate side and the public was left with worthless paper. When a merger was done, it was usually by means of using an already inflated stock as currency. No real hard cash was used, so discipline flew out the window and value was not created.
Contrast the activity of the late 1990’s with today. Now, the smart, sophisticated money is not manufacturing new product to sell to investors, they are reducing product by buying back shares from investors. So the question must be posed to today’s skeptical pundits: If you claim that masses of new product aggressively sold to investors by the ‘smart money’ (the IPO’s of the 1990’s) was a sign of a frothy market top, how can you claim that product aggressively bought back from investors (the LBO/M&A activity of today) is also a sign of a market top?
To believe that today’s market shrinkage is a sign of a market top is to believe that mom and pop investor are craftily selling out at the top to savvy insiders who will be left holding the bag. Right. In some Bizzarro alternative universe. The most likely conclusion is that once again, the sophisticated are scalping the naïve. That the LBO, the M&A, the stock buyback at levels that today seem high will soon, with the benefit of hindsight, appear to be very reasonable. And that, friends, is why this bull market has a lot more snort left in it. Or as Frost would say “Good buybacks make good markets.”
Robert Markman, Portfolio Manager, the Five Star Markman Core Growth Fund (MTRPX) -- a dynamic and responsive large cap growth, no-load mutual fund with a portfolio strategy developed to adapt to the changing investment environments. His techniques and processes have helped him guide his fund to five star Morningstar ratings over the past three and five year periods.
www.markman.com 952-920-4848.
Jack Bowers and Fidelity Monitor Newsletter Posts a Stunning Twenty-Year Record: Bowers is exclusive strategist for Weber Asset Management.
Textbooks and academics maintain that it is useless to try to beat the market. And they are right; most investors, including the large majority of professional investors, lag the market averages over the long-term.
That is what makes the accomplishment of Jack Bowers particularly impressive. Bowers edits and publishes Fidelity Monitor Newsletter, and he has beaten the market with what some might consider a handicap or two. He did it by using a) only straight-forward mutual funds and b) only mutual funds from one fund family – Fidelity.
According to figures published in the April, 2007 issue of the Hulbert Financial Digest, if an investor followed the advice provided in the Fidelity Monitor Newsletter's "Select System" portfolio since 1987, as of 3/31/07 they would have gained 14.0% annualized. During the same period the annualized gain of the Wilshire 5000 was11.5%. This Select System is a technical trading model, using six Fidelity sector funds at all times.
Bowers’ "Growth Model" portfolio uses fundamental analysis for its fund choices. Yet it too rose 14.0% annualized since the beginning of 1987. It typically holds four Fidelity broadly diversified funds.
It is extremely rare for a portfolio manager to succeed using two vastly different investing models, technical and fundamental, but Bowers has done it. Many of the most prominent financial pundits advise investing solely in index funds, because you can't do any better. They would say when someone beats the market for five years, they are simply lucky, but when you beat the market for ten years, it might be skill.
When you beat the market for twenty years, the only superlative left is "stunning."
Bowers, an electrical engineer by training, takes his scientific skill and chooses to focus with laser beam precision exclusively on the funds available from one fund family. He says that knowing a great deal about that small piece of the huge mutual fund universe is smarter than trying to follow thousands of funds.
And as Hulbert as shown so dramatically, the proof is in the pudding.
Jack Bowers, Editor, Fidelity Monitor, can be reached at (800) 397-3094 or
FidMonitr@aol.com. Bowers is the exclusive investment strategist for Weber Asset Management, Lake Success, N.Y. Ken Weber can be reached at ken@weberasset.com, or 800-438-3863. Weber provides wealth management services to individuals and families as well as full service 401k) plan design, implementation and performance evaluation.
Create a Plan to Liquidate Restricted Stock on a Favorable Timetable
The One-Pony Portfolio is Dangerous No Matter Your Age
Recently, a 30-something, let’s call him Joe, realized that his portfolio of restricted company stock (restricted as to the timing and amount of stock that can be sold) was both very valuable and very volatile. He knew he needed to diversify, but did not feel that his broker and related brokerage fees was the way he wanted to go. He consulted a financial advisor for broader financial planning advice, prompted by a realization that the decision of how and when to sell his restricted stock should be part of a personal long-term financial plan.
Joe is the employee of a start up company and received the restricted shares as the result of an acquisition of the company. Although stock options can have greater wealth-building potential than restricted stock, restricted shares have increased in popularity, especially due to concerns about structural flaws and potential abuses of stock options.
Managing restricted stock is difficult without professional guidance for several reasons. First, many holders of restricted stock not only resist the notion that the value of the stock could go down dramatically, but wonder how much higher it could go. Whether driven by greed or unrealistic optimism, holders of restricted stock would often be wiser to lock in their new wealth.
Additionally, holders of restricted stock, like most of us, don’t want to pay the taxes due to the sale. Strategies for managing the tax consequences of selling restricted stock must be considered, but as the saying goes, “Don’t let the tax tail wag the dog.”
In addition to hope for further appreciation and fear of taxes, holders of restricted stock are subject to specific rules about when the stock can be sold.
Because restricted stock can be a highly concentrated part of any portfolio, careful management of restricted stock is essential to make certain that you protect the value of your portfolio through diversification. To make funds available to diversify their portfolios, holders of restricted stock may be wise to liquidate their positions as soon as they can, pay the taxes, and lock in their gains.
As the gains are realized, work with a financial advisor to build an over all asset diversification plan, based on your long-term financial needs. The use of mutual funds and exchange traded funds (ETFs) will allow Joe to hold a broadly diversified portfolio including fixed income funds for stability and equity funds for growth; both the fixed income and equity funds in his portfolio should be further diversified across numerous U.S. and foreign sub-markets. If he is not already a home owner he may want to include real estate as part of a diversification plan. Joe can also do some early retirement planning and estate planning and talk to his advisor about his charitable intentions, something most folks do not put on the agenda until retirement age.
For individuals who realize the value of diversifying as soon as possible but are restricted from liquidating positions immediately, there are several strategies to protect their positions from future declines. From simple to complicated, strategies to consider include protective put options, covered call writing, equity collars and prepaid variable forwards. Since each strategy has advantages and disadvantages, the strategies should be discussed with a knowledgeable advisor.
Barry Taylor , CFP, 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. Barry's long experience as a retail small business owner informs his commitment to protecting capital and planning for asset growth. Barry Taylor -- barry.taylor@bosinvest.com 415-781-8535.
401(k) INDUSTRY
Target Date Funds Pale in Face of Managed Accounts in 401(k) Plans
Professionally managed accounts for 401(k) plan participants are far superior to target date funds because they avoid the built-in difficulties of target date funds:
• All target date funds do not have the same equity exposure which could lead to fiduciary problems for the plan sponsor. For instance, T. Rowe Price Retirement 2020 is 77% equity, Principal Lifetime 2020 is 56% equity and Fidelity Freedom 2020 is 68% equity.
• The plan sponsor may have a target date fund in a multiple fund lineup that is simply a bad performer. For instance, recent 3-year returns for 2010 showed a wide variance in performance with the best performer at 9.55% and the worst performer at 3.89%. The 3-year returns for 2020 funds show the same discrepancies. The best 2020 performer is 10.94% and the worst performer is 6.34%. Interestingly, both the best and worst performing 2020 funds had 55-56% equity.
• It is unlikely that plan participants will use the target date funds correctly:
Recently Kohler Corporation removed all lifecycle funds from their lineup because their misuse was so universal that they were causing more harm than good.
A Fidelity study showed that 50% of participants holding a lifecycle/lifestyle target date fund owned other funds also, despite education that showed participants that such funds were a complete portfolio investment.
Anecdotal evidence in the industry reported many times, indicates that participants will allocate 10% of their deferrals across all of the target date funds, effectively negating their function.
The benefits of managed accounts are numerous:
• A managed account is actively managed by professionals diligently working to protect assets on the downside and grow assets when the market is rising.
• A managed account advice provider is independent from the 401(k) plan vendor or fund companies who are providing the investments in the plan.
• Managed account providers offer an additional layer of fiduciary protection for the plan sponsor.
Plan sponsors must investigate offering managed accounts to their 401(k) plan participants to avoid the predictable problems stemming from the increasing numbers of target date funds inside 401(k) plans and their built-in problems.
PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 3/31/07, PMFM manages $916 million. The firm has increased its assets under management by nearly 25 percent in the last year. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach National Sales Manager Tim McCabe at 800-222-7636 or tim.mccabe@401ktoolbox.com.
ESTATE PLANNING & RETIREMENT
When Early Retirement Financial Options Are Confusing and Intimidating
Too many choices in how to take retirement income increase your opportunity for mistakes.
When a company announces that a segment of its employees will be offered early retirement, critical financial and retirement decisions must be faced. For employees who struggle with choices involving their 401(k) plan, making decisions about how to take their retirement payments can be overwhelming.
Here are several rules to consider when you must evaluate an early retirement package from your employer:
1. Gather all the information your company sends you and read everything before you try to make a decision. Decisions such as whether you will take an annuity, or what kind of payment plan you may choose tend to be in cement once you sign on the dotted line.
2. Identify the date you must make a final decision and take advantage of the time you have to become informed about your options.
3. Ask for help, either from your human resources department. They have special staff that have been trained by your employer to answer your questions, or from your own financial advisor. Early retirement may substantially change your existing financial plan and your financial advisor should be notified.
Often, retirement options include different kinds of annuities that hold your retirement assets, or the opportunity to roll over your assets into an IRA. Your decision depends on your comfort level with what is being offered. Even the decision to put your money into an IRA over which you hold complete control requires thought.
Many advisors advise their clients to roll over their pension assets into a Roth IRA because of significant tax benefits.
Distribution Options
Your company will certainly offer you a choice of distributions: you can choose a higher distribution if your pension ends with your death, and a smaller distribution if you intend that your pension continues to support your spouse during their lifetime. Pay attention to the differences between the Maximum Life Option and the Joint Survivor Options. If you qualify for life insurance, you may prefer to take the maximum life option and pay for a life insurance policy from t hat amount that will support your wife after you die rather than taking the lower joint survivor option.
Working Post Retirement
Most workers have not saved enough for a comfortable early retirement. Continuing to work may be the most viable option you have. Look for a job that allows you to keep health benefits and continue investing in a tax-deferred 401(k). The longer you stay on the accumulation track and not require income distributions from your pension to live, the brighter your retirement will be.
Social Security
When to begin taking Social Security benefits is a unique decision by everyone because of longevity, health and need. Some simply default into taking their benefits at age 62. You may want to consider delaying applying for social security benefits as long as possible; at least until your full retirement age. Social Security Benefits are taxed. If you take the benefits early (age 62) you dramatically lower the monthly benefit check. You can go online at http://www.socialsecurity.gov and calculate your expected benefits. See for yourself how your benefits increase if you wait until full retirement age or later to make a claim or talk to a fee-only financial advisor about how your pension, savings and social security will all work together.
Early retirement decisions can be full of pitfalls. Take this time to deliberately look at all of your options. Make certain you understand the full ramifications of your choices. Pension decisions are usually permanent and many people will be living with your early retirement decisions for 30-40 years.
Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers.
Reverse Mortgages Will Become HUGE!!
Coordinated Team Essential to Implement Financial Strategy
Providing your family with a coordinated financial team under one roof has become a high priority for wealthy families who want their wealth management professionals in one place, moving toward one strategy. Too often, wealthy families have advisors working in separate environments. The accountant is primarily concerned about taxes, the estate planning attorney with the law, and the investment manager with the portfolio. It simply doesn't work. An office that can provide you family with successful investment managers, skilled estate planning attorneys, and tax accountants, all with an in depth understanding of your overall goals and legacy wishes, will offer the following services:
Tax avoidance or Abatement
• Reduce or eliminate transfer (estate) taxes and capital gains taxes.
Money Management
• Provide superior investment administration with continuous supervision and management
• Increase the family's long-term wealth
• Screen financial opportunities presented to family members
• Consolidate and simplify an efficient, fully integrated wealth-management process
• Search the world for the right services and products at the lowest possible cost
• Unburden inheritors from financial responsibilities external to their particular family and career
Estate Planning and Legacy
• Implement financial and estate plans
• Protect assets from liability, litigation, and probate
• Establish inter-generational financial continuity using cutting-edge technology and innovation
• Help family achieve a sense of significance and satisfaction derived from how assets are used.
Coordination
• Provide one consolidated statement for all family brokerage accounts and hold brokers accountable for performance and commissions
• Take responsibility for entire team working toward an agreed upon goal
• Care and long term planning for family members who have special needs
Cost Efficient
• Minimize all expenses and fees
Education
• Provide financial education to the inheritors of wealth
• Develop financial assets and earning capabilities of younger family members
Privacy
• Maintain absolute confidentiality
Pearson Financial Services, Dennis, MA, is the author of "The Two 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.
Five Easy Pieces: Is Your Investment Advisor On Your Page?
We shop for our cars, our homes, our children's schools, our healthcare providers and virtually every other resource that has the potential to enhance or diminish our life experience. So why don't we shop for our investment advisor - the service provider we entrust with the well-being of one of our most precious resources?
How many of us have interviewed an investment advisor lately? How many consumers can say that their advisors gave satisfactory answers to the following questions?
1) What is it about you - your education, your technical training, and your life experience - that uniquely qualifies you to be my investment advisor?
2) What is your investment philosophy, and general process, and how does it create value above and beyond what I can accomplish on my own?
3) How should I, as the client, measure the return on my investment in you as the advisor?
4) How do you, as the advisor, render transparent: i) the return on my invested capital and ii) the return on my overall investment in the advisory relationship?
5) How do you, as the investment advisor, connect my capital with my life vision?
More critically, how many of us will know if, and when, to re-evaluate our investment advisory relationship because it is no longer serving to enhance our lives?
We spend a fortnight analyzing consumer reports to select our next car. What prevents us from asking the five easy questions to ensure that the horsepower under our portfolios provides the strongest, smoothest, most direct ride to our goals? 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.
529 Plans Can Provide Excellent Funding for a Child’s College Education, but Generous Grandparents Should Know Their Impact on Their Estate Planning
529 Plans allow for the tax-free growth of money in the plan to provide funding for a child or grandchild’s college education so long as distributions from the plan are used for qualified college expenses including tuition and books. These 529 Plans are also helpful for Grandparents who want to help their grandchildren and do some effective estate planning at the same time.
Contributions to 529 Plans are subject to Gift Tax law limitations. Individuals can contribute up to $12,000 annually without running afoul of the Gift Tax.
The 529 Plans can be front-loaded as well, an additional benefit. A grandparent, or other generous individual, can make 5 years of contributions in one year ($60,000) to a 529 Plan on behalf of another individual. Meaning an elderly couple could contribute $120,000 in one year to a grandchild's education through a 529 Plan. The couple would be ineligible to make additional gifts to that individual over the 5-year period. The couple has the flexibility to fund the 529 Plans for all their grandchildren in a manner that suits their personal estate planning needs.
If the donor dies before the 5-year period ends after making such a gift, a percentage of the gift will be counted back into the estate for purposes of determining estate taxes, but the money does not actually leave the 529 Plan.
There are other benefits. A key takeaway is that Grandparents can give money and still maintain a measure of control while not damaging a child’s ability to acquire financial aid, a factor that may be of serious interest to the grandchild’s own parents.
If you establish a Uniform Transfer to Minors account (UTMA), you permanently give up control of the assets. When the minor reaches the age of majority (normally 18 or 21), the child gains full control of the money and can use it for college or tattoos or a trip to Europe.
In a 529 Plan, the child is merely a designated beneficiary. The owner of the account, usually the parent or grandparent, can always change the beneficiary. If a child fails to perform in college or decides that she wants to take her band on tour for a year, the owner can change the beneficiary to a relative who can use the money or choose to maintain the existing beneficiary in the hopes that the child comes to her senses.
If the grandparent makes a direct gift to the child or to an UTMA, that gift will count as an asset of the child in determining their eligibility to receive financial aid. For a 529 Plan with a parent as the owner, the money in the plan will count as an asset of the parents in determining financial aid. Parental assets get a much higher discount than a child’s assets in the financial aid formula.
It may be a better strategy for the grandparents to remain the owners of the account, so that the money in the 529 plan does not become part of the financial aid equation at all.
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.
PRACTICE MANAGEMENT
Customized Financial Plan Can Now Include Suggested Investments to Fund Retirement Healthcare Costs
WorldCare North America's Web-based suite of resources has expanded to include the HealthView Financial Plan. The plan can be customized for an institution to promote particular investment products, or integrated into a proprietary financial planning tool.
The customized financial plan complements the Personal HealthView Report that provides consumers with their accurate, projected out-of-pocket healthcare expenses in retirement. This personalized analysis is far more accurate than anything else on the market. It is based on the consumer's health, medical history, and lifestyle.
That information is matched with the actuarial likelihood of their length of life. For instance, existing diagnoses of diabetes, cancer and serious heart issues shorten the expected length of life as those illnesses are factored into the projected health care costs.
The HealthView Financial Report offers consumers an investment strategy to fund their out-of-pocket healthcare costs in retirement. In addition, the HealthView web site provides advisors with the ability to create scenarios for their clients based on different retirement dates, changes in healthcare coverage, and potential health changes. The HealthView Financial Report is a unique sales tool that helps advisors
address their customers needs in retirement with accurate projections and customized investment strategies. With this report, advisors can truly provide an accurate financial plan that addresses their clients' healthcare needs based on their health and healthcare coverage. Ron Mastrogiovanni is the president of WorldCare North America, a provider of medical advisory services including Web-delivered health assessmen programs that offer personalized health risk tools and analyses. The company also offers independent medical consultation services through some of the nation's leading research institutions, including Brigham and Women's Hospital, Dana-Farber Cancer Care, Duke University Health System, Massachusetts General Hospital, and UCLA School of Medicine. WCNA's platform of services is provided to consumers through financial institutions, affinity programs and employers. To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America – 617-250-5167.
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