The Financial Procast

Today we've come to talk about two things as it relates to the housing market: 1.  The Burgeoning and exciting growth of the housing market after the precipitous fall in 2007-2009 and 2.  The envious Americans that can't afford to buy the house they want and feel the need to complain about it. In fact, the census tells us that new homes in America are bigger than ever--they seem to be increasing with our waist lines. The data tells us that in 1983 the average new home size was 1,725 square feet.  In 2013, thirty years later, the average has increased to 2,598 square feet. Standard size just got bigger Why is it that the size of our houses is getting bigger? Are families increasing in size? No not exactly. We can't honestly point to any specific need for any of this. It seems to be that it’s just what Americans want right now. There is a prevalence of things that have become commonplace in many new houses. For example, thirty years ago there weren't too many people who had offices inside their home or big spacious “bonus” rooms over the garage. Another interesting development is that houses from 3000-4000 square feet are occupying a significantly larger portion of new home construction than ever before. In 2005, homes that size (3000-4000sq.ft.) comprised about 15.6% of new home building--in 2013 it has risen to 21.7%. What’s more--there has been a decrease in smaller homes. The number of 3 bedroom, 2 bathroom houses (classified as 1400 square feet or less) has dwindled to about 4% of the total housing market. One more statistic on "Mega Houses"—defined as houses that are larger than 4000 square feet were 6.6% back in 2005 and they're now at about 9%. So we definitely like our houses bigger than ever before. None of this is probably all that shocking, so why is this newsworthy fodder for the Financial Procast? Well, not everyone can afford these mega houses and a lot of them are complaining about it.  It's just not fair that I went to college and don't make enough money to have the house I want. And I have to pay back all these student loans. Wow...let us call the Whaaambulance for you. One of the biggest complaints that we've seen recently is that younger people are finding it increasingly difficult to purchase real estate in their neighborhoods. The problem is that they don't have enough money to buy in the neighborhood they want and it's really hard to get financing when you are overrun with student loan debt. Also, a recent story from CNN pointed out that it's really hard to compete with buyers who are purchasing with cash. Gee, is it a sad commentary that this is such a revelation to so many? If you were selling your house and you had two comparable offers but one of the two was contingent upon mortgage financing and the other was an "all cash" offer, which would you choose?  I'll give you about 2 seconds to think that one over. Of course you would rather go with the buyer who's paying cash. Instead of waiting for the bank to agree that my house is worth the price we agreed upon and having some an inspection where you pick apart every paint chip and grout stain, I'll just got with the person who can write a check in a couple weeks after he/she has a title company do a little work to make sure everything is kosher. Seems logical to me but what do I know. There's another big gripe that seems to be coming from the same group of whiners and that is that they can't afford houses in the areas that they want to purchase them. Yes, it turns out that buying a house close to a city center is a bit more expensive than a comparable place in the suburbs. And that's just not fair dammit!  I want what I want and if I can't afford it, I'm gonna throw a temper tantrum and make a big fuss. Energy Wasted Perhaps we should all consider devoting more of our energy toward making MORE money and less time whining about the fact that we don't have enough. You are focused on the wrong thing here,

Today we've come to talk about two things as it relates to the housing market: 1.  The Burgeoning and exciting growth of the housing market after the precipitous fall in 2007-2009 and 2.  The envious Americans that can't afford to buy the house they want and feel the need to complain about it. In fact, ... Keep Reading

Unfortunately this week we don't have a Tommy Boy clip to weave in to the Financial Procast, so you'll have to be entertained or at least mildly amuse by our "normal" sense of humor. Today instead we figured we talk about pensions. Less so pensions ...

Unfortunately this week we don't have a Tommy Boy clip to weave in to the Financial Procast, so you'll have to be entertained or at least mildly amuse by our “normal” sense of humor. Today instead we figured we talk about pensions. Less so pensions in particular and more so that the AARP recently published ... Keep Reading

I'm sure there are some of you who will pick up our little easter egg in the title of today's financial procast. For those who remember that great scene from the movie, Tommy Boy, I give you permission to skip down to the bottom of this page to watch a little clip. And for those who have no idea what I'm talking about, do yourself a favor and skip down to the bottom of the page and watch the clip. Most likely you'll enjoy that much more than reading anything in between. You're welcome by the way, we aim to please here at the insurance pro blog.  Are Life Insurance Guarantees Important? Whole life touts higher guarantees but counter party risk will always exist, and just because a carrier issues a contract with higher guarantees does not mean that it benefits the policyholder. Case in point, there is one whole life insurance company that has issued whole life contracts with a 4.5% reserve rate for years, and it’s a terrible cash accumulator and the internal rate-of-return (IRR) on death benefit is atrocious. No, we're not naming names here but if you'd like to know who it is, contact us and we can let you know who it is. Do we see things that make us believe the whole life focused carriers are more profitable and can bring better returns to policyholders? Not really here are the numbers: Average yield on investments for WL carriers: 5.32% Average yield on investments for IUL carriers: 5.8%   Average net income among WL carriers: $169,709,000 Average net income among IUL carriers: $850,827,170  (5x the WL companies)   Average net income to revenue WL carriers: 1.29% Average net income to revenue IUL carriers: 6.37%   Average Revenue/income WL carriers: 11.97% Average Revenue/income IUL carriers: 9.33%   Average admitted assets WL carriers: $86 billion Average admitted assets IUL carriers: $87 billion   Average ROE WL carriers: 6.04% Average ROE IUL carriers: 13.95%   Average interest margin WL carriers: 67.56% Average interest margin IUL carriers: 52.87%   Average surplus ratio WL carriers: 12.93%--> $11 billion in surplus Average suplus ratio WL carriers: 10.95%-->   $9.53 billion in surplus   The truth is that carriers who generate most of their revenue from universal life insurance have a lot more free cash flow from operations, meaning they can absorb a bad year more comfortably than WL carriers.  We’ve seen this play out more recently, div rates have bounced around a lot, cap rates on IUL have remained pretty consistent. The carriers who focus on participating whole life insurance do have a larger surplus position, but this only generally affects death benefit reserving strength, it's not as important when evaluating their potential to provide better cash accumulation.  Though it shouldn’t be completely ignored, since a strong surplus position could help pay dividends or interest in a given year.  It could also help defer expenses from a bad year or economic situation. Another advantage that many companies who focus on universal life is that they generally have access to certain capital that goes beyond reserves (public companies have access to capital markets).  Mutual companies are way more dependent on surplus since the only other option is a surplus note, which somewhat more restrictive.  Additionally, whole life insurance in general requires higher reserving. Our big takeaway is this: universal life insurance carriers want to be just as competitive as those who focus on whole life insurance and will not drop contract benefits unless they really have to.  The fear mongering from mutual companies is not warranted as the numbers just don't add up. Yes you could make the point that whole life insurance focused companies do pay substantially more dividends and one could argue this drags down the net income number, but the truth is that universal life insurance companies carriers pay interest instead of dividends,

I'm sure there are some of you who will pick up our little easter egg in the title of today's financial procast. For those who remember that great scene from the movie, Tommy Boy, I give you permission to skip down to the bottom of this page to watch a little clip. And for those who ... Keep Reading

For a number of years Dave Ramsey's 12 percent assumed rate of return has been a mainstay of the radio hosts's case for the average American to invest in the stock market.  He believe that this strategy yields the best path to prosperity. Many have taken Dave's suggestion at face value while others–like us–raise an ... Keep Reading

For a number of years Dave Ramsey's 12 percent assumed rate of return has been a mainstay of the radio hosts's case for the average American to invest in the stock market.  He believe that this strategy yields the best path to prosperity. Many have taken Dave's suggestion at face value while others--like us--raise an eyebrow at this seemingly outlandish suggestion. You can get a 12 percent rate of return by investing in the stock market? Hmmm....I guess but it sort of depends on what stocks you are investing in exactly. Taking Dave Ramsey's 12 Percent to Task If you're wondering why we've decided to take Dave to task, yet again, we'll point you toward an article over at the Motley Fool written by Brian Stoffel titled, Retirement Planning: The Dangers of False Optimism.  We recently discovered the piece as Mr. Stoffel had linked one of our articles that we wrote regarding compound annual growth rate. Stoffel's post was written back in 2013 but the information will be forever relevant or "evergreen" as it is known amongst content producers. I won't go into any great detail here as it is not my intention to steal any of Mr. Stoffel's thunder but I will implore you to read his piece as it shines some light on the subject. The article clearly ruffled Dave's feathers as Stoffel earned himself an invitation to be heard on the Dave Ramsey Radio show.  Here is a link to that clip. What's the Big Deal? Well, in the end, Dave declared that Brian was "splitting hairs" and that he can do whatever he wants because it's his radio show. Which brings to mind a quote from Senator Daniel Patrick Moynihan: Everyone is entitled to his own opinions but not his own facts Splitting hairs? The actual compound annual growth rate (CAGR) of the S&P 500 since 1926 is actually 9.87% not 12%. And I understand that Dave says that was just for illustrative purposes but why not illustrate it correctly? Anyway... That 2.13% difference per year would mean difference of $1,657,096 for a $20,500 annual investment over 30 years. That doesn't really seem like I'm splitting hairs, does it? Let's not forget the real dander of illustrating the S&P 500 from 1926--it didn't exist in 1926. That's right, the S&P in its current form was established in 1957 and there are less than 87 companies in the index that were present in 1957. So, I say "investing" in the S&P 500 is a bit tricky. But You Can Take 8% at Retirement That's right, evidently you can safely assume an 8% withdrawal rate from your accounts when you retire because you're earning 12% per year on average. If you take out 8% that still leaves you a 4% positive spread. What a swell idea. Only, you don't have a 4% positive spread because you  don't have a 12% return, you have a 9,87% return, don't you? Let's run another experiment.  If we look at CAGR from inception of the S&P 500  to the economic boom of the 1990's (1957 to 1990) the CAGR of the market is 6.5%. And if we look at 1957 to 1980 it's only 3.72%. Stoffel points out that if you took Dave's advice, you would have a 43% rate of failure at making it through your retirement with any money. So, since 1926 if you picked a  date and lived to your life expectancy at that given time period, almost half the time you would have run out of money using Dave Ramsey's calculations. I don't know about you but I'd like the probability of success to be a bit higher than 50/50. Remember you only get once chance to get this right. You can make the math work (i.e. I think I"m going to get X return) but if it doesn't quite get to that assumed rate, it won't play out  as you assumed and you don't get a do-over.

In our practice, there's often a discussion that develops around the idea of universal versus whole life insurance and we know this sacred battleground for many of our colleagues. Indeed people do have choices which as we all know can be a good thing and a bad thing all at the same time. Something that happens ... Keep Reading

In our practice, there's often a discussion that develops around the idea of universal versus whole life insurance and we know this sacred battleground for many of our colleagues. Indeed people do have choices which as we all know can be a good thing and a bad thing all at the same time. Something that happens for us very often as we discuss with our prospective clients the idea or using life insurance as an asset, leveraging the cash value accumulation to create retirement income, et. al.  is a certain degree of "analysis paralysis". I think most people are familiar with the concept but I'll clarify briefly. For us, it just means typically that people get a little hung-up on which type of policy is the right policy for them. And we are certainly not making light of the decision. Many times our clients are making a substantial financial commitment that will continue for some time well into the future. Not the sort of decision someone makes without a fair amount of consideration. We are well-versed in both universal life insurance and whole life insurance and we hold no allegiance to one or the other. When we have  circumstance where one is the clear winner, we recommend that our client go with the option that works best for them. For us it's not often a universal versus whole insurance discussion as it is a which one makes the most financial sense for our client. Why It's not Universal Versus Whole Life Insurance? We deal with both products every day, so we are comfortable with either one. There's no fundamental bias from us toward either product. Ironically, it seems that often times when a person really would be better served by universal life insurance, they choose to use whole life insurance and vice versa. So along the way we hypothesized "Why not just do both?" You could certainly own a whole life policy and a universal life policy, we have clients who do own both and they certainly have their reasons for doing so. So, the idea of owning both seems to check of the "diversification" box that is so coveted in a world that has been infiltrated and brainwashed by modern portfolio theory. And it would seem better than getting bogged down in the universal versus whole life insurance minutiae. But there are times that diversification isn't the answer.  And this is one of those times. There I go again saying things that will likely get me in trouble with the financial media overlords...oh well. Seriously--sometimes diversification just waters down your result. Sometimes it means a lack of focus will result in a mediocre returns when we put it in the context of the investment world. Don't overlook Scalability The issue at hand for you with life insurance is that there is a certain amount of scalability to these products. And so, when you don't split your money between two products you don't have to pay to fixed costs associated with owning a universal life insurance policy and a whole life insurance policy. There are times when more premium into the policy equals a higher yield on the cash that is received. In other words, there's a certain scale that exists which allows a higher rate of return on cash by paying a higher premium into one policy. The truth is that we (Brandon and Brantley) live in a world where we are trying to maximize and enhance certain efficiencies within the product for our clients. Which is why we don't spend much time debating such things as universal versus whole life insurance. There are some people within our industry that having many different policies is a great idea. We are not two of those people. Sometimes it is simply unavoidable, for people to have one or more different policies with different companies. Many times those policies were purchased at different periods of their life. Financial situations have a way of changing as we move through life. But from a diversification standpoint it just doesn't work out all that well.

Getting the right financial advice is important and the truth is that average financial advice is really for average people.are so many financial media outlets present and they are more than willing to throwout generic financial advice. Additionally, there are countless bloggers that offer up what we might refer to as “boiler plate” financial advice. You ... Keep Reading

Getting the right financial advice is important and the truth is that average financial advice is really for average people.are so many financial media outlets present and they are more than willing to throwout generic financial advice. Additionally, there are countless bloggers that offer up what we might refer to as "boiler plate" financial advice. You know the sort of thing I'm talking about:  make maximum contributions to your 401k, contribute to a Roth IRA, spend less than you make (that's pretty good advice actually), don't run up excessive consumer debt via credit cards, use qualified plan contributions to reduce your taxable income and the list goes on. Now, not all of this financial advice is bad. It's just no-risk type of advice for anyone that wants to discuss issues surrounding personal finance. Who Needs this Sort of Financial Advice? As anyone who's ever taken a high school writing and/or composition class learns, it's crucial that you understand the psyche of the person you are writing for.  So, who are these people offering up this super plain and vanilla financial advice trying to reach. Who's the target? The target for most of the super generic financial advice floating around out there today is the vast swath of people who are right in the middle. You must always remember that financial media is much like other media outlets in that the sole purpose for their existence is to sell advertising. And companies that spend big bucks on advertising pay "by the eyeball".  Most brands want to see huge numbers of subscribers, readers, unique page visits or listeners. Ads are sold based on the number of impressions--that's the way it is now and has always been. The financial press is targeting the middle 70% (figuratively) with this sort of financial advice that's been carbon copied everywhere for the last 20+ years.     Brandon:   Hello and welcome. This is the financial procast. It is Thursday May 22nd, 2014. This is episode 110. I am Brandon Roberts. Brantley:   And I'm Brantley Whitley. Brandon:   I just realized that May is almost over. Brantley:   Is that a bad thing? Brandon:   It’s bad when winter seems to have lasted until at least the middle of May. Brantley:   You didn’t have much of a spring because it went straight to 80, right? Brandon:   You got it. I’ll tell you want though. The trees and flowers, it did not take much to get those guys to bloom. In one day in the 80s, and it’s like poof! Brantley:   That started here about two months ago. Brandon:   I'm aware there were many places in the united states that have much better weather that had bloomed trees long ago. Brantley:   I did see some places in the Midwest were having snow just a couple days ago or something like that. Brandon:   That storm system is going to bring plenty of rain my way. Brantley:   Just what you needed. Perfect for someone who has a gravel driveway. It’s mostly mud and holes. Brandon:   We could get some really big fans and try to blow it back down into San Diego where they need rain. Brantley:   There you go. Take that southern California. Brandon:   We’re trying. Brantley:   Really big fans. That’s always a great plan. What are we going to complain about today? Brandon:   We’re not complaining about anything today. Brantley:   Awesome. Brandon:   We’re simply asking a question. Brantley:   What's the question? Brandon:   Here's something that I have long wondered. There's a multitude of financial press media outlets out there. There are a lot of them. We don’t even need to name them. They are very willing to throw out generic financial advice to everybody who’s willing to listen. There's a lot of people who have things like little personal finance blogs and they write a lot about generic financial advice to people and it always follows the same line of thought; max out your 401k, contribute to an IRA.

The financial crisis of 2008 was over nearly five years ago but recent research shows us that investors are still having a really hard time finding the balance between performance and safety. Today we have a barrage of statistics showing us that investors are still not quite sure they should be back in the stock market ... Keep Reading

The financial crisis of 2008 was over nearly five years ago but recent research shows us that investors are still having a really hard time finding the balance between performance and safety. Today we have a barrage of statistics showing us that investors are still not quite sure they should be back in the stock market or investing at all following the financial crisis back in 2008. As you’ll see the numbers from the two surveys are bit disconnected from reality, however, that’s pretty consistent with our anecdotal evidence of investor psychology over the last few years. I guess you could say this episode is a little reminiscent of Eyore if you remember that love curmudgeon of a character from Winnie the Pooh. We felt like we were just delivering bad news after going through the information for the show. We've seen some statistics recently that are derived from research done by compiling surveys conducted by Natixis and Gallup that were charged with collecting data about investor sentiment. According to the survey, which set out to gauge some very broad feelings from investors about how they feel regarding investment objectives—what they identify as success or failure, how they feel regarding what sort of return they need to achieve to get where they need to be etc. The enlightening part about both surveys is that both the Gallup and Natixis data arrived at a very similar result. The two individuals surveys seem to validate one another quite well. How Do People Feel About Investing Post Financial Crisis? The big takeaway from both surveys is that there is this weird back-and-forth kind of tug-of-war that is taking place among investors. It’s clearly an intense emotional struggle that people are dealing with and it’s no great surprise, we’re all a bit sensitive when it comes to our money. The emotional tug-of-war has safety of principal on one side and expected returns on the other. Why the battle? It’s hard to say definitively but we do have a theory based on our daily conversations with people regarding their finances. People are really torn—they the impression of the financial crisis in 2008 is deeply burned into their psyche and despite the fact that we have had a sold five years of outstanding market returns since 2008 there lingers a reminder of reality. In the back of our minds we have this consideration that we could have a big correction at any moment. And if we do have a major correction, all of the gain that I’ve gotten in the past five years is going to vanish into thin air…or at least some significant portion of that gain. The most fascinating observation of both surveys is that roughly 74% of investors stated that they would take safety over performance. That’s a much larger number than I would have anticipated. In other words, these investors are saying yes I will choose “preservation of my principal” at the cost of higher expected returns. I will accept that trade-off . The irony to me of course is that I would venture to say six or seven years ago we would have gotten a totally different response from a majority of investors. Do remember how enthusiastic we all were back 2006 and the early part of 2007? I can remember it vividly. Consider how different a response this survey would’ve gotten in 1999 when the dotcom boom was in full swing. Back then we were all was convinced the stock market only moved in one direction--up. Remember that? You could've gotten a much similar response in the mid to thousands in regards to real estate. Remember when all the pundits on TV told people that real estate only went up? Our entire financial system was built on that foundation of sand. Fortunately I think that most people have now decided that it’s a fairly high-risk strategy to take out three mortgages to buy houses, pull out the cash and invest the money in the market. 74% Prefer Safety Over Potential for Higher Gains

There's so much bad advice that gets passed around the life insurance industry that sometimes it's hard to point out the real stinkers. But today, we're zeroing in on the misguided direction that some self-appointed life insurance gurus have been spewing into the world over the last few years. What's the bad advice? Well it actually ... Keep Reading