Understand the Commotion in the Economy

Thursday, 18 September 2008 09:00

Dear Clients and Friends,

We have received a number of calls asking what’s going on with all the commotion in the economy these past few days.  To address this, we thought we would write you to explain a little of what’s going on.  I have yet to see a good explanation in the news, mostly only finger pointing that is avoiding the mention of the underlying problems. 

For a more exhaustive explanation, yet in a reader-friendly format, please go to our website at www.brockfc.com, then click on the archive of our firm’s newsletter, “Making Sense.”  Then click on the newsletter for March, 2008.  In that edition I wrote an extensive article explaining exactly what is going on in our economy now, and the fundamental causes of what has happened with Freddie Mac, Fannie Mae, Lehman Brothers, Merrill Lynch, and AIG.  In fact, whether you have any concerns about our existing economic environment or not, I would ask that you read or re-read this article because it will explain many things. Also, we posted articles on our website blog regarding these issues blog several weeks ago, on August 26th (What You Should Know About Today's Economy) and on August 29th (One More Time...Let's Understand This Economy Now).  We ask you to visit our website and explore it to learn more.

After you read that article, I would like to stress the following points:

1.     This is a problem primarily within the Investment Banking Industry.  This industry is regulated by the federal government through the Securities and Exchange Commission.  “Investment Banks” are also known as “broker-dealers” that specialize in raising capital for companies, either by taking companies public, or by raising additional capital through issuances of stock or corporate bonds. 

2.    It is also a problem, to a lesser degree so far, within the Commercial Banking Industry. This industry is also primarily regulated by the federal government through the Treasury Department and the Federal Reserve Board (the “Fed”). “Commercial Banks” are what we usually think of as banks, such as Bank of America, Wells Fargo, J.P. Morgan, CitiCorp, etc. that lend money to businesses and consumers.

3.    This is not a problem of the Insurance Industry, in spite of what you might read about AIG (more about this in a moment).  This industry is regulated by state governments through their Insurance Departments. The Federal Government does not regulate the insurance industry. The insurance industry is not a holder of “sub-prime mortgages” and derivatives. The States have been conservative and prudent in administering their duties. 

4.    This is a similar environment the financial industries faced in 1929—during the Great Depression—when the stock market lost 90% of its value and there were “runs” on banks, but have you ever heard of there being “runs” on insurance companies during the Great Depression?  No, they kept right on paying their dividends. 

5.    In my humble opinion, as I have maintained for years, the Federal Government and the Fed has been delinquent in their duties regarding this matter. For example, Alan Greenspan, Chairman of the Fed from about 1987 through 2005, insisted that derivatives (a) did not need federal regulation, and (b) did not need to be disclosed to the general public or investors on Balance Sheets or other financial statements. They were what’s called “off balance sheet transactions.” Read my article in our March, 2008 newsletter for more on this.  

6.    Unfortunately, as I pointed out in March, this is a problem of massive proportions that has received little discussion by the press or media, on Wall Street, by regulators, in Congress, by candidates, or anywhere else. This is the first I have finally heard it spoken of, and even now, they are not addressing the underlying problems.

7.    In spite of what you might read about the “sub-prime” crisis, the real underlying problem is the massive leverage that  has been taken on by these institutions through a tool called “derivatives.”  This problem is beyond the size of the U.S. Government, or any coalition of governments, to resolve, and it will likely take five years to unwind the problem. The “sub-prime mortgage” crisis is not the great problem in our economy as it is being portrayed.  But, it has exposed the problem, and exacerbated it by being the trigger that has started the dominoes falling.

8.    As I mentioned in my newsletter article, and above, this is not a problem of the insurance industry. State Insurance Commissioners have not allowed insurance companies to invest in derivatives. What about AIG?  AIG is the parent company to many subsidiaries. Some of those subsidiaries are profitable and financially strong insurance companies, such as American General and others that issue life insurance policies and annuities. The parent company (AIG) also has other subsidiaries that are banks or others that have invested in derivatives. Because the insurance companies are regulated by the states, the states and laws do not allow the parent companies to access the assets of their profitable subsidiaries. Thus, these companies are distinct entities that are “walled-off” and maintain their own financial strength ratings. If you will note, some news organizations have reported that AIG wanted to “borrow” $20B from their profitable subsidiaries and have portrayed this as “borrowing from itself.” This is a false characterization. Having said this, there are a number of issues to consider with AIG, and so if anyone has a contract with AIG, we ask that you call us to discuss your specific circumstances. (Incidentally, I personally own several life insurance policies issued by subsidiaries of AIG.)  We also recommend that you call us if you have contracts with Sun Life Assurance for recent news there.  

9.    Those invested in the market have lost lots of dollars, and they are on a wild roller-coaster ride. Unfortunately, some in the news are reporting this as a “buying opportunity,” and to just “stay put.”  We believe this is a long-term economic problem that will take a long time to unravel, and we are only at the beginning stages. 

10.    Recently, some have been dismayed that their “indexed annuities” have shown a zero return during the past year.  This is because the market has been down.  But, no-one’s accounts are down, no-one’s annuities have lost money, no-one has seen their principal erode as have the vast majority of those with retirement assets. Isn’t that better than losing your principal? Our clients that have money in indexed annuities are not losing their money.  So, this crisis does not apply to you.  For those of you that might think you have too much in the stock or bond markets, we invite you to call for an “annual review.”

11.    Remember, that your annuities also have a “fixed” account that has a minimum guarantee of 3% annually that you can transfer your assets into should you so desire.

12.    Also, within the past few months we have had a few individuals that have been persuaded by their stockbrokers to keep their assets in the stock and bond markets, when we had recommended that they put “ safety and preservation of principal” as a higher priority. To those, we recommend that you call us to schedule an appointment to discuss things in light of recent developments. 

13.    Our office is currently doing a study to identify all insurance companies that are subsidiaries of other parent companies, and whether or not that parent holds derivatives. Then we will report our findings to you either in our monthly newsletter or on the blog on our website.

In summary, if you have followed our advice and your assets are in life insurance or annuities through us, either traditional fixed annuities or indexed annuities, you have not lost any capital during this financial crisis.  Your principal is safe. For more on this, please see the press release below issued today by NAIC, the National Association of (state) Insurance Commissioners.  Your annuities do not perform like stocks, bonds, mutual funds, or variable annuities, nor do they perform like real estate which can also go down in value. You have a long-term program designed to insulate you from economic volatility.

We would like to stress that we believe this is a long-term systemic problem that may take years to unravel (This does not necessarily mean that the market won’t have up years in the interim. We would be happy to explain why, and how you can better position yourselves for the years ahead.  If you are prepared, you have nothing to fear.  We have done our best to position each one of you for such an occurrence. We invite you to call for a review of your program in light of recent economic developments.        

Sincerely,

Brock and Associates, LLC
435-673-9599
Since 1979

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Financial Update: Current Economic Conditions

Last Updated (Wednesday, 17 September 2008 13:27)

Dear Friends,

As the financial climate on Wall Street continues to deteriorate, we wanted to take just a moment to address some of your growing concerns.  The recent collapse of Lehman Brothers and then the subsequent Fed bailout of AIG this week has many concerned about their financial prospects.  We would like to offer some comfort and encouragement to our clients regarding these recent developments.

If you are a client of ours, most if not all of your assets are already separate from the securities industry, banking industry, and stock market industry.  And while these industries are facing some real challenges, the insurance industry is just fine.  These troubled banking industries are regulated by the Fed, which happens to be one of the primary reasons for the problem.  The insurance industry on the other hand is regulated on a state level.

There has been some concern regarding insurance policies with AIG.  The policies that are with AIG are actually insured by American General.  AIG is the parent company, with American General as a subsidiary of AIG.  The parent company dollars and the insurance dollars are segregated from each other, and cannot be accessed by the parent company.  So despite these troubled companies best efforts to get out of the mess their derivatives have created, they are unable to access the dollars from the insurance sides of the company.  Insurance policies owners are safe from the problems of the parent company.

Insurance companies, regulated by the states, have always taken a conservative approach to their investment portfolios.  Unlike securities, banking, and stock market, the insurance industry has avoided derivatives that have caused this financial crisis.

While the financial climate is unsettling, you may rest assured that you have appropriately prepared.  The insurance industry is doing fine, and is not subjected to the same type of collapse occurring in other industries.  We suggest that you review some of the economic discussions that Hank Brock has written dating back to March and April of this year. Below is link to these two articles for you to review.

Sincerely,

Brock and Associates, LLC

What You Should Know About Today's Economy

One More Time...Let's Understand This Economy Now

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Beware Phony Credentials When Selecting a Financial Advisor

Last Updated (Friday, 12 September 2008 10:45)
Written by Hank Brock, CPA, MBA, CLU, ChFC

“Investors should beware of salespersons claiming credentials, such as ‘Certified Senior Advisor’ (CSA) that sound impressive, but require little training or skills,” so says the Utah Division of Securities (Division Newsletter, Oct., 2007.)

Credentials, expertise, education, experience and ethics matter, which is why those that work for years to achieve legitimate credentials scoff at those that attempt a short-cut to credibility.

The most popular legitimate credential in the financial planning industry is the Certified Financial Planner®, or CFP®.  A much older, lesser recognized, but accredited college offers the Chartered Financial Consultant, or ChFC. Both require years of experience and adherence to a strict code of ethics. The ChFC actually requires the same six courses required for the CFP, plus two more. Those who’ve taken both the CPA and ChFC exams often comment that the tax exam for the ChFC is actually more rigorous than the CPA exam’s tax questions.  

The Certified Retirement Financial Advisor, or CRFA, focuses on financial issues for seniors, and holders of both the CFP and ChFC may take the pre-approved CRFA courses to meet their continuing education requirements.

The complaint against other credentials, such as the CSA, is that they often may be “bought” with a fee, a quick 3-day class, and only a few hours focused on financial issues of seniors.

The Division warned against other ways a financial advisor may attempt a short-cut to trust, “Other times [trust] is implied because the promoter and investor both belong to the same church…”  Many are especially vulnerable when they are impressed by someone’s church connections. Reputable planners don’t “wear their religion on their sleeve.”

 

Nine Issues to Consider

First, is the consultant experienced? Ask about how many years he has been in business, what has been the nature of his practice and the types of problems he has solved, his existing clients, and the breadth and depth of experience.  You may not think your issues are complex, but you are likely not aware of some of the strategies that could benefit you most, nor are they be understood by a novice. For example, it may take years of apprenticing to be ready to address the myriad issues facing seniors, so don’t be someone’s guinea pig.  This is especially true in the area of tax and estate planning, where many novices present public seminars with only a basic understanding of complex issues. 

Second, as mentioned earlier, what is your advisor’s educational background? Look for bonafide credentials such as ChFC, CFP, CPA, CLU, JD, or other legitimate credentials. These signify background in investments, taxation, estate planning, finance, business, insurance, law, economics, etc. and require comprehensive examinations from accredited educational institutions, years of experience, and advanced continuing education requirements.  Beware of those that solely have one of the many “quickie” designations proliferating these days.

Third, does the advisor have a commitment to high ethical standards? Look for membership in at least one industry association (such as NAIFA, Society of FSP, FPA, IBCFP, etc.) that enforces a code of ethics.  Of particular concern in ethics are those that not-so-subtly use their church affiliation in advertising.        

Beware of those that resort to “announcing” their high ethical standards by implying some religious or church connection. A person will usually find that the advisor is relying on an “implied endorsement” or “short-cut” to gain trust and cover-up other deficiencies in his educational background.  Members of the LDS faith have been cautioned by their leaders about this “short-cut” to trust, but all could benefit from this counsel. One’s church affiliation should not have anything to do with one’s competencies or ethics, so beware of someone that uses their church affiliation to promote their business.  Unfortunately, many seniors look to church affiliation as a sign of trustworthiness, and fall prey to inferior services, and too often scams.   

Fourth, is there a commitment to continuing education? Complex laws are ever-changing and the economy never holds still. How many hours are spent each year keeping skills sharp?  Are the continuing education hours at a beginning, intermediate, or advanced level?

Fifth, what services do you need? Comprehensive retirement, tax strategies and estate planning? Solely tax advice? An investment advisor? Real estate advice? Or, is he just an insurance salesman? Identify an advisor that emphasizes the services you need.

Sixth, is your advisor a solo-practitioner? Or is your advisor part of a team that he can turn to for strategizing on complex issues? Or to bring an additional perspective? Is his firm large enough to provide the extensive resources as a large firm of pros?  

Seventh, what’s the average client like? If your net worth is $500,000, and your advisor primarily deals with people with a net worth of $3-10 million, will you get the attention you need?  Are there other advisors in the office that would give you better attention while still benefiting from the firm’s resources? Does the advisor primarily work with senior citizens, professionals, business-owners, or whom? Will your unique needs be addressed?

Eighth, how is the advisor compensated? Is he/she paid by fees only, commissions, or both? More about planner compensation in an upcoming article.

Finally, is your advisor a professional? Be wary of persons who are merely part-timers working out of the trunk of their car, lack membership in professional societies, omit commitment to continuing professional education, and criticize others who do commit to high standards. Often they will downplay the need for education, or boast they “know more about estate planning than most attorney’s out there.”  Smooth salespeople are often very charming, and may even present a charismatic public seminar—but they may also be dangerous because they don’t know what they don’t know.

When you find an advisor you feel comfortable with and there is a philosophical “fit,” consult thoroughly, be loyal, and have fun. A successful advisor has excelled in his profession for the same reason anyone has excelled in theirs: because he loves what he does, and because of the people with whom he is privileged to work and help.  He enjoys his rewarding relationships, and sincerely wants his clients to achieve the success they want.  For more information on selecting a financial planner, check out our post "11 Keys to Selecting a Financial Planner."  

Hank Brock is President of Brock and Associates, a local fee-based financial consulting firm that celebrates its 30th Anniversary in 2009.

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The 25 Biggest Mistakes Seniors Make

Tuesday, 09 September 2008 09:12

Print this page out and put a check-mark next to any mistake you may be making or have not fully explored.

1. You have not taken all steps legally allowed you to protect your assets, especially your home, from frivolous lawsuits or creditors. (A Living Trust provides no protection.)

2. You have not taken all steps legally allowed you to transfer your assets from a taxable environment, to an environment that can generate a tax-free retirement income to you and pass income and estate tax-free to your heirs.

3. You are not aware that IRAs and annuities are the two assets that are subject to double taxation upon death, and have not taken all steps possible to avoid this.

4. You have not done adequate IRA Distribution Planning, with the objective to minimize or avoid taxes on the dollars distributed from your IRAs. You have not explored ways that may result in distributing part or all of your IRA tax-free.

5. You have merely postponed or deferred taxes on highly appreciated assets, such as real estate or stocks, through 1031 exchanges, thereby leaving assets subject to high income or estate taxes to yourself or heirs, versus using legally allowable means to by-pass capital gains taxes upon the sale of an appreciated asset (Capital-Gains By-Pass Trust). "A bird in the hand is worth two in the bush."

6. You consume non-IRA dollars first while leaving IRA dollars to grow, taking only the "required minimum distribution," when working the numbers often yields that you should be consuming IRA dollars first.

7. You have not taken steps to assure that unintended persons do not unwittingly become the beneficiaries of your estate, in spite of the traditional use of wills, living trusts, and the customary beneficiary designations on IRAs, annuities, and life insurance policies.

8. You are paying taxes on income you are not using (on interest that is being reinvested annually), rather than using all steps legally allowed you to avoid those taxes and only pay taxes on dollars you are using.

9. You have not taken the steps legally allowed you to avoid taxes on your Social Security Income.

10. You do not understand that income tax rates are as high as 65% on much of your retirement income, not 25%-35% as you supposed, or how to legally avoid this.

11. You have not taken steps legally allowed you to avoid state income taxes on investment income, state sales taxes on major purchases, or state property taxes on major personal property items (i.e., autos).

12. You have not taken steps to earn interest that participates in growth-type investments, i.e., the stock market indices, while insuring your accounts against any downside market risk or losses. Every year all gains are locked-in.

13. You have too many of your dollars tied-up in so-called "safe" assets (such as CDs) such that, after subtracting taxes and after-inflation, you are actually losing dollars. You feel paralyzed without choices, and are not aware of the safe alternatives.

14. You do not understand why inflation is the #1 enemy of longevity, nor the devastating long-term effect of inflation on investments, especially bonds, whether or not you hold the bonds to maturity.

15. You do not understand how to manage away each of the various types of risks out of your investment portfolio: default or fundamental risk, market risk, inflation risk, interest-rate risk; and how you are most vulnerable given the most probable future world economic conditions.

16. You do not realize that your life expectancy is longer than you think, and you have not made provisions to guarantee that you cannot outlive your income.

17. You do not understand the most common mistakes made by owners of annuities and life insurance, and what your insurance agent did not do when establishing those policies, or why you could end-up paying more than 50% of those annuities and/or death benefit proceeds in taxes.

18. You do not understand why transferring your home from Joint-Tenancy into your revocable living trust could have devastating implications, or how to rectify.

19. You do not take advantage of many tax breaks available for retirees simply because you are not aware of them, and you have not re-structured your assets and income to take maximum advantage of potential tax breaks.

20. Because of a lack of planning, your heirs receive a fraction of what they could receive without any additional significant effort, or complexity.

21. Because of a lack of planning, assets are passed to your heirs via the typical living trust in a manner that aggravates or creates ill feelings between heirs and weakens their character, rather than passing assets in a way to strengthen family togetherness and strengthen character.

22. You do not take advantage of special provisions of the tax code that could allow you to: increase your retirement income, plus pass twice as much to your heirs as currently, plus pass an equal amount to a church or charities of your choice, and get the IRS to essentially pay for the strategy. (Give your estate away twice and have IRS pay for it.)

23. Your estate plan consists of the usual components: Wills, Living Trust, Power-of-Attorney, Health Care Directives-Living Wills-but 9 times out of 10 you have unknowingly left one of your largest (if not your largest) asset to pass outside your estate plan and be excluded from your wishes for how your estate is to be distributed.

24. You have selected the wrong trustees for your revocable living trust and other trust(s).

25. You have left yourself or heirs vulnerable to higher fees that could otherwise have been avoided, in the areas of: asset or portfolio management fees, trust administration fees, legal fees, accounting and tax preparation fees, charges and loads on acquiring annuities or life insurance policies, and probate fees-fees and expenses that could have been avoided or minimized.

If you are making any of these mistakes, we urge you to schedule a time to come in and meet with one of our qualified financial advisors here at Brock and Associates.

Brock and Associates is a Utah based financial consulting firm specializing in retirement, estate, and tax planning. Copyright Brock Financial Network, LLC, 2006 – All Rights Reserved.

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The Walt Disney Legacy: A Lesson in Legacy Planning

Last Updated (Friday, 06 March 2009 10:28)

There are few better stories to emphasize the importance of legacy planning than the story of Walt Disney shortly before his death in 1966. Mike Vance, former dean of Disney University, tells this story of Walt Disney’s legacy as portrayed by Walt's final hours in 1966 in his book, Think Out of the Box:

“At Disney studios in Burbank, California, Mike could gaze out of his office window across Buena Vista Street to St. Joseph’s Hospital, where Walt Disney died. Mike was talking on the telephone when he saw the flag being lowered over the hospital around 8:20 a.m. His death was preceded by an amazing incident that reportedly took place the night before in Walt’s hospital room.

“A journalist, knowing Walt was seriously ill, persisted in getting an interview with Walt and was frustrated on numerous occasions by the hospital staff. When he finally managed to get into the room, Walt couldn’t sit up in bed or talk above a whisper. Walt instructed the reporter to lie down on the bed, next to him, so he could whisper in the reporter’s ear. For the next 30 minutes, Walt and the journalist lay side by side as Walt referred to an imaginary map of Walt Disney World on the ceiling above the bed.

“Walt pointed out where he planned to place various attractions and buildings. He talked about transportation, hotels, restaurants, and many other parts of his vision for a property that wouldn’t open to the public for another six years.

“We told this reporter’s moving experience, relayed through a nurse, to our organizational development groups, . . . the story of how a man who lay dying in the hospital whispered in the reporter’s ear for 30 minutes, describing his vision for the future and the role he would play in it for generations to come.

“This is the way to live—believing so much in your vision that even when you’re dying, you whisper it into another person’s ear.”

Soon after the completion of The Magic Kingdom at Walt Disney World, someone said, “Isn’t it too bad Walt Disney didn’t live to see this?” Vance replied, “He did see it. That’s why it’s here.”

Even after Walt Disney passed from this life, his vision of the future held strong. He had established firmly in the minds of all those he came in contact with the vision he held of the future. Even today, some forty-two years after he died of cancer, Walt Disney continues to influence millions upon millions of people each year.

And while many of us may not have the lofty aspirations of Walt Disney, we have still accumulated over the course of our lifetimes a collection of wisdom, knowledge, and virtue that we would like others to benefit from.

Walt Disney's last hours weren't spent determining how his estate would be allocated amongst his heirs. They were spent laying out his plans for the future. As he laid there whispering into the reporter's ear, he described in detail how his legacy would live on long after he had passed.

With legacy planning, you are not only able to minimize taxes and maximize the amount of money that you pass on to heirs, but you are also able to influence the spiritual, intellectual, and ethical development of family members.

A good legacy plan comes from knowing, living, and then planning from your values. You are building bridges that will take you and those you love to greater levels of abundance, purpose and significance.

It is important to understand that legacy planning needn't be egotistical; it can be much more than just a selfish desire to control from beyond the grave. Legacy planning can be an altruistic venture for the creator, an ability to provide for, guide, and influence for good the family members they are leaving behind.

Future generations can both benefit and experience from what you have learned. Your passion in creating a truly significant legacy can inspire, motivate, and uplift for generations. You can rest with the knowledge that you have passed on the skills, attitudes, and values necessary to manage those thing that you leave behind. As you plan your legacy, you are providing the means for your family to live happy and productive lives.

When the day comes that you pass from this life, will you be passing on a legacy similar to Walt Disney? Or will you leave your family wishing they had more to remember you by? Consider carefully how you intend to pass along the things that are most important to you.

If you are interesting in developing your own personal legacy plan, schedule time to meet with a specially-trained financial advisor at Brock and Associates, LLC. Don't risk allowing your legacy to be lost when you pass.

Brock and Associates is a fee-based financial consulting firm specializing in retirement, estate, and legacy planning.  Brock and Associates will be celebrating its 30th anniversary in 2009. 

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