The Financial Procast

(Complete Show Notes Below) In the 55th episode of the Financial Procast:  ESOPs Gone Wild The DOL has filed a lawsuit against the California Pacific Bank.  It seems that after the bank unwound their ESOP, they violated ERISA law by shortchang...

(Complete Show Notes Below) In the 55th episode of the Financial Procast:  ESOPs Gone Wild The DOL has filed a lawsuit against the California Pacific Bank.  It seems that after the bank unwound their ESOP, they violated ERISA law by shortchanging the employees who were the plan participants. First, we thought it appropriate to offer ... Keep Reading

(Complete Show Notes Below) In the 54th episode of the Financial Procast:  The Survey Says... People actually care about what professional designations are held by their financial advisers...or at least a recent survey would have us believe they care.  According to the research firm ORC international, an overwhelming majority of those people survey indicated that they would much rather work with an adviser who was distinguished by his/her professional certifications. Now I'm not saying certifications don't matter. In fact, I believe that some designations are quite valuable as they relate to the rigorous academic requirements one must endure to obtain the designation.  However, I've been in the financial services industry for a bit over 13 years now and I've yet to see any real evidence that proves an adviser is more or less qualified to practice based on these designations. Again...it's not that professional certifications and designations don't matter. I just argue that most normal people have no idea as to what any of it means.  In the financial planning/advisory world there are a handful of organizations that have designations that are 100% legitimate, require rigorous study and examination to complete etc.  But even those handful of organizations can't agree on what the benchmarks should be? There's no consensus in the financial planning world.  Other than people who sell products and earn a commission for doing so are inherently evil (rolling my eyes). Also, let's not discount the fact that this type of survey is terribly flawed.  People will generally answer the questions the way they think they're supposed to. It also seems that people think "knowledge of financial planning" is important when selecting a financial adviser.  That sounds good and we'd agree that it is important. How does the average person define that?  Sounds good right?  But it's a totally subjective measure. The survey also indicates that people would prefer to have one relationship or a "one stop shop" to handle everything in their financial lives.  I agree that this sounds so good...so very convenient.  But the problem is that it just doesn't work very well. We talk intelligently with our clients about all aspects of their finances, however, we're way too busy doing what we're really good at to advise them on every detail.  We can't watch investment accounts, make buy/sell decisions, decide the timing of transactions etc.  If we're doing that then we're not going to excel at our life insurance analysis which is our true specialty.  The one-stop shop results in  mediocre results across the board. Lincoln Enters the Fray Lincoln National (LFG) has decided to enter the deferred immediate annuity or deferred income annuity market.  What is a deferred income annuity (DIA) you ask? It's a bit like a single premium immediate annuity (SPIA) in that it will give provide you a guaranteed income stream in exchange for a lump sum premium/deposit.  This new product, the DIA is a bit different in that you can provide a lump sum in exchange for an income stream at some point in the future--deferred.  The upside is that it gives you a bit better result than using a SPIA. New York Life pioneered this category a few years ago.  In our analysis, the two dominant players in terms of offering the best payouts combined with financial stability are New York Life and American General.  So, it will be interesting to see how Lincoln competes. It's a $930 million market, but it's a small part of the $34 billion fixed annuity market.  But this class of product is to likely gain steam in years to come.  More and more companies will probably enter the market as the need for guaranteed income has become very evident to consumers, particularly as great numbers of baby boomers retire with large qualified plan balances (401k, 403b and 457) that they need help distributing. Also,

(Complete Show Notes Below) In the 54th episode of the Financial Procast:  The Survey Says… People actually care about what professional designations are held by their financial advisers…or at least a recent survey would have us believe they care.  According to the research firm ORC international, an overwhelming majority of those people survey indicated that ... Keep Reading

(Complete Show Notes Below) In the 53rd episode of the Financial Procast: Is Timing Risk All About The Whims of the Stock Market? Most of us think that timing risk has everything to do with a buy low, sell high sort of discussion and our goal is to maximize our overall rate of return.  But truthfully there's more to it than that.  Timing risk is applicable to more than just rate of return, it really pertains to the fluctuation or variability of your assets.  Think about this for a second, if you buy assets at a set price and the market (whatever market it may be) has a correction or adjustment, think 2000-2001 or more recently 2008.  The markets typically come back but there was, in both cases, a significant depreciation of your assets. This poses a problem. There may be things that you want or need to do with your money during that time but you are hesitant to do so for obvious reasons.  Unfortunately, the advice that most  financial advisers will give their clients (even us in a past life) is "Well, you have lost anything unless you sell, it's just a paper loss".  True...kind of. That line of thinking works if you don't actually believe in mark to market asset valuation.  But for the rest of us that live in the real world where the market value of our assets is all that really matters, watching our assets lose value in a particular market is a very real thing. Think about the real estate crash of the past several years.  If you went to your banker and wanted any kind of equity loan on your house, what would he look at to determine if the loan makes sense?  Well, of course he's going to look at your credit, your earnings, and finally he's going to look at the market value of your property.  You can argue all day that you paid $300,000 for your property but if the market value is $250,000 that's the number he's going to use to determine your eligibility. The variability of markets can significantly alter your ability to seize opportunities as they arise. And it becomes even more important when you are looking at your retirement assets. You Can't Control the Order of Returns Averages are fine to look at but please make sure you understand the difference between average annual rate of return and compound annual growth rate.  A good starting point is to look at this post to make sure you fully understand the difference: Compound Annual Growth Rate vs. Average Annual Rate of Return: Wall Street's Greatest Sleight of Hand The Methodology Behind “Average” Rate of Return After you've looked at that you should go back and look at this post: Why Life Insurance Works So Well for Retirement Income Which is the basis for the analysis discussed in this episode.  You'll notice that depending on the order of returns, you run out of money before you planned despite the fact that the rate of return is identical.  If you get hit with a huge decline in the early years of your retirement withdrawals,  timing risk becomes very real to you. As you can see, that rate of return will not do anything for you if you don't mitigate your losses or control the order of returns you receive.  Hopefully, you just grasped the absurdity of the second part of that statement. What market sensitive investment gives you control over the order of your returns?  If you could predict market returns, you probably wouldn't care less about anything that we have to say.  Can you place your rate of return exactly where you want it over the next 20 years?  That would be a useful skill. You'd always stack your best returns at the beginning of the period in descending order.  But you can't control that obviously so the only thing you can control is the ability to mitigate the loss. So what about savings bonds...could that be the answer?  hahahahahahaha...funny right?  You definitely mitigate losses but the rates are a bit too low to even consider them a viable alternative. What about life insurance? Could it work?

(Complete Show Notes Below) In the 53rd episode of the Financial Procast: Is Timing Risk All About The Whims of the Stock Market? Most of us think that timing risk has everything to do with a buy low, sell high sort of discussion and our goal is to maximize our overall rate of return.  But ... Keep Reading

(Complete Show Notes Below) In the 52nd episode of the Financial Procast: Here we go again, slaughtering sacred cows.  Of course, if you followed us for any length of time none of this will come as any great surprise to you. You don’t have look far and wide to find financial talking heads extolling the ... Keep Reading

(Complete Show Notes Below) In the 52nd episode of the Financial Procast: Here we go again, slaughtering sacred cows.  Of course, if you followed us for any length of time none of this will come as any great surprise to you. You don’t have look far and wide to find financial talking heads extolling the virtue of using your 401k to stash away money for your retirement.  Frankly, it’s sort of nauseating. And I suppose I shouldn’t just single out 401ks as being way over-hyped because the same zeal also applies to all other types of qualified retirement accounts.  The financial media LOVES these things.  They’re always talking about the power of tax-deferral, the “free money” your company gives you…yada, yada, yada.  httpv://youtu.be/e7sR8VX6mnk This debate sits front and center for us. On a regular basis we work with people who are at retirement or rapidly approaching that time.  And they realize as they stare into the abyss the impending tax liability that faces them. Please believe us when we tell you, the psychological and emotional impact of this should not be underestimated.  Money is emotional and writing big, fat, juicy checks to Uncle Sam brings out the worst of the emotions. For many folks, the tax refund now turns into a substantial tax bill. Conventional Wisdom is Bogus The most common mistake we see other financial planners and individuals make is to assume that after retirement you will be in a lower tax bracket.  While it may be true in some instances, more often than not, we just don’t see it. And I will add, this is in our experience at a practical level…not hypothetical.  Unfortunately too many advisers only seem to work in textbook hypothetical scenarios. Do you really want your plan to be that you will have less income when you retire?  Why would you plan to have less? If conventional wisdom actually works, you won’t have just the money you put in the plan, you’ll have those dollars plus all the dollars that get added to the pile through appreciation, interest etc. along the way.  So, that means you’ll be paying taxes on a much bigger pile o’money.  Don’t Discount Risk Another common tenant of using qualified retirement plans is to project out into the future using a hypothetical rate-of-return—typically we see people using 8-10%(which is ambitious). Consider this… To even approach getting those type of returns, you’ll have to take on a substantial amount of market risk. That means over the years you’ll have to get comfortable with some degree of volatility that’s associated with the stock market. If you survive the wild ride and your balances come out exactly where you projected, why would you want to give a substantial amount of that money to the government? You took all the risk and now you’re going to give them half of it?  Doesn’t seem like such a great deal to me.

(Complete Show Notes Below) In the 51st episode of the Financial Procast: Infinite Banking Gets Slammed In a recent article over at ProducersWeb, Roccy DeFrancesco owner of the Wealth Preservation Institute took on the patriarch of all thinks related to infinite banking concept, becoming your banker, bank on yourself et. al. It seems that Roccy ... Keep Reading

(Complete Show Notes Below) In the 51st episode of the Financial Procast: Infinite Banking Gets Slammed In a recent article over at ProducersWeb, Roccy DeFrancesco owner of the Wealth Preservation Institute took on the patriarch of all thinks ...

(Complete Show Notes Below) In the 50th episode of the Financial Procast: Why is Income in Retirement so Different? In today's broadcast of the Financial Procast, we head off into some deep water with a lengthy discussion surrounding retirement income.  What is it about retirement that makes everyone think their life is going to magically ... Keep Reading

(Complete Show Notes Below) In the 50th episode of the Financial Procast: Why is Income in Retirement so Different? In today's broadcast of the Financial Procast, we head off into some deep water with a lengthy discussion surrounding retirement income.  What is it about retirement that makes everyone think their life is going to magically change?  There's really nothing that is going to decrease the importance of your income when you retire. One of the worst "rules of thumb" that's been perpetuated among the retirement planning discussion is that somehow you should only need about 80% of your pre-retirement income during your retirement. What?  Who came up with that idea? Yeah, there are some circumstances where people make a strategic decision to live on less so that they can leave a job they hate or a career that has come to an end.  However, I'm not aware of any case where someone just arbitrarily reaches 65 and says, "Yep...that's it...I'm done and now I'll be happy living on less income now" Just doesn't happen. Most of us are accustomed to living on a monthly budget, we're paid every week, every other week or twice a month. So, it stands to reason that having some income producing assets that provide that sort of income would fit nicely into our world...right?  It makes your life much easier to budget when you break it down into smaller pieces.  We're all billed monthly for our basic services and we have learned to live within our monthly budget.  Furthermore, those monthly bills don't stop coming after you retire. What's Wrong with the Retirement Planning Industry? For years, the industry as a whole has been focused on helping people to accumulate wealth.  There has been very little focus paid to the distribution of those assets.  Consequently, not many advisors have the skill or education to effectively assist their clients with planning for retirement income.  In fact, we would suggest that generating income is completely contrary to the goal most financial advisors have been trained to pursue. Another major problem is that assumptions used for planning income have been skewed by a set of faulty data.  If we look back at someone who retired in the early 1980's, they would have been able to buy long term bonds that had really high coupons (think above 10%). So, that falsely set the expectations of many people that they would always be able to obtain really high fixed rates on bonds during retirement. I'll just invest primarily in equities during my working years and then swap my allocation over to more heavily weight bonds that pay a nice juicy coupon.  Well, we all know how this is working out now for people retiring today. Not to mention a serious flaw...bonds are not without risk.  There's default risk and  interest rate risk, both of which many people have learned about the hard way. Okay...what's the solution? Listen and find out.  Enjoy!  

(Complete Show Notes Below) In the 49th episode of the Financial Procast: The Rich Are Saving By the Truckload According to a recent study, those who earn more than $750,000 are saving an average of 37% of their income.  That's almost 3x what they were saving just five years ago.  It's good to be wealthy…right? ... Keep Reading

(Complete Show Notes Below) In the 49th episode of the Financial Procast: The Rich Are Saving By the Truckload According to a recent study, those who earn more than $750,000 are saving an average of 37% of their income.  That's almost 3x what they were saving just five years ago.  It's good to be wealthy...right? People Who Make More than $750,000 Aren't Planning to Retire   Are Auto Insurers Playing Fair? The Consumer of Federation of America recently released statements against the auto insurance industry because the industry has admitted to setting rates for coverage that discriminate against certain levels of education and occupation.  The CFA calls it "unfair and discriminatory" but is it? To find out what we think...listen to the podcast!

(Complete Show Notes Below) In the 48th episode of the Financial Procast: Letter to 6,000 401(k) Sponsors Causes a Stir Yes indeed…there are a great many financial advisers who are running around with their hair on fire after many of their plan sponsor clients received letters from Ian Ayres, a Yale Law School professor, stating ... Keep Reading