Investing

10 Tips About Buying Annuities

By admin  |  2009/11/18 10:05 Posted in Financial planning, Investing, Retirement planning  |  Comments (0)

What are Banks, Broker Dealers and local friendly insurance salesman selling to retirees and those near retirement? The answer is Annuities.

The stock market has plummeted and people are worried about losing more. Insurance salesman (could be in a bank, or at a broker dealer) can take advantage of that fear and use it to sell the apparent benefits of an annuity.

An annuity is a contact from an insurance company to pay back the principle with interest. However the devil is in the details. Remember, if it sounds too good to be true, it probably is. Before you buy an annuity think about these tips!

1. Always know what the interest rate will be for the entire duration of the surrender period. Do not buy one where you know the first year rate and the following years are left to the discretion of the company.

2. In a low interest rate environment (such as what we have now) it is not wise to purchase an annuity with a long lock on the rate. When interest rates rise, you are locked in to the low sub market rate.

3. The preferable time to purchase an annuity is in a high interest rate market. If rates fall in the future you locked in the higher rate.

4. Get annuity quotes from 3 separate sales people. The reason is that some annuities have high commission that hurt the client either with long surrender periods or reduced interest. Some salesman are more motivated by the higher commission than doing what is best for the client. By talking to 3 different salesmen you are more likely to be offered a better contract.

5. Index Linked Annuities are very complex. New rules are being put into place to create more regulation for their sale. These are sold primarily because the agents make bigger commissions than fixed annuities.

6. Be very skeptical of an annuity salesman who recommends an annuity as a means to access Medicaid if a nursing home may be needed. There have been changes in the law in this area and further change can occur.

7. Depending on the age of the client (and other factors), make sure there is no surrender charges should the funds be needed for a nursing home.

8. Avoid those annuities that have a “bonus up front”. They either have long surrender periods, lower interest in later years or limit how much you can withdraw.

9. Be sure to specify the correct beneficiaries. Should you pass away you need to be certain to whom the money will pass. This should include both primary and secondary beneficiaries.

10. It goes with out saying that you want a highly rated company. The best list of all the rating services of all the companies is The Insurance Forum that publishes a list each year and is available for a small fee. http://www.theinsuranceforum.com/pages/ratings.html

Keep in mind that big companies like AIG and The Hartford got Government bailout money so how safe is the annuity?

If you are thinking of an annuity, talk to an expert that is not trying to sell you one.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice

10 Tips for These Difficult Economic Times

By admin  |  2009/11/16 12:42 Posted in Cash-flow budgeting, Financial planning, General info, Investing, Retirement planning  |  Comments (0)

The recent economic changes impact everyone and particularly those who are retired. Whether it is a drop in value of your retirement account or a decrease in interest rates at the banks, everyone has noticed.

The question is – what can retirees do now to shore up their finances? Some things are fairly obvious, such as delaying a vacation, going to a less costly restaurant or putting off major purchases as long as you can.

But there are other things retirees can do to help in these difficult times:

1.    Know what and where you’re spending. Saving a dollar is easier than making one. Keep track of what you spend each month. This is an easy way to help you identify those areas you might be able to cut back without impacting the quality of your life. Use pencil and paper, a computer program such as Quicken® or Excel, or an online tool available at: http://www.mint.com.

2.    Shop your insurance program. There can be large differences in premiums from one company to the next and it is wise to re-shop your insurance package (home and car, etc.) with several companies every few years.  The savings are often in the hundreds of dollars.

3.    Comparison shop banking services. Many banks have raised fees and decreased interest rates.  As an example, Bank of America investment services money market account now pays a 0% interest. Customers would do well to go elsewhere. Don’t overlook your local credit union or banks outside the area. Searching online can help identify institutions with higher interest rates.

4.    Beware of something that sounds “too good to be true.” Be cautious about an invitation for a “free lunch” to learn about an “investment that can never go down,” “Earn extra money from your home,” “Long Term Care without paying for it,” etc. Remember there is often fine print or a hook and they are always selling something. If you don’t understand it, avoid it or at least seek a professional second opinion (from someone who’s not selling the product).

5.    Do not be the victim of scare tactics. Do not let salespeople take advantage of you in reaction to the recent economic havoc. An 83-year-old client was recently sold an annuity at her bank and she cannot get all her money back until she’s 93, which is totally inappropriate.

6.    Do not take retirement plan distributions if you do not need them. A new law allows retirees to not take a minimum distribution from certain retirement plans. The concept is to allow the values of the account to come back up and then resume distributions.

7.    Understand your investments costs. In this environment, it’s crucial that you have a firm understanding of all the fees (commissions, sales loads, deferred charges, redemption fees, surrender fees, account fees, management fees, distribution fees, and even statement fees).  Depending upon the size of your portfolio, going to investments with lesser costs could save you thousands of dollars a year.

8.    Proper asset allocation in your portfolio. Having the proper mix of different types of investments is the prime way to mitigate risk. The allocation that is appropriate for you is dependent upon your risk tolerance (a mental state), your risk capacity (your financial state) and your goals, which includes your timeframe. The people that felt the most pain with the recent drop in the market had an incorrect asset allocation.  Now is a good time to make sure your asset allocation is correct.

9.    Determine if you need help. It’s what you don’t know that can hurt you the most.

To help identify the areas where you could use some professional assistance, a Financial Security Survey was developed. It’s free and can be very reveling.  Go to the website below and download the survey or call 800-347-1340 and it will be mailed to you.

http://www.chamberlainfp.com/pdf/fp_security_survey_retire.pdf

10.  If you need help, get objective advice. Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek, and AARP all have had articles recommending people get objective advice from a “fee-only” advisor.  These individuals do not sell product, so there is no conflict of interest between what is best for you and the person who is selling a product.  The publications above recommend readers go to http://www.napfa.org and http://www.garrettplanningnetwork.com for a list of “fee-only” planners in your area.

While these 10 tips will not undo the effects of the changes in the economy, they offer some practical steps you can take to strengthen your finances today and position your retirement savings for improvement as the economy comes around.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advice.

Beware of Bogus E-mail to Obtain Personal Data

By admin  |  2009/11/02 11:09 Posted in Investing  |  Comments (0)

The use of e-mail is increasing by all groups, including retirees. Unfortunately criminals are also increasingly turning to e-mail as a means to defraud individuals.

I recently returned to the office after being out of town for three days and checked my e-mail. I found three e-mails that were apparently from Bank of America, Citibank and PayPal, all indicating that there was suspected activity on my accounts and to immediately click on the link within each e-mail to confirm important information about my account.

I did call each company, and none had, in fact, sent me an e-mail.

I had been an intended victim of “phishing,” which involves an official looking e-mail from a large bank or other online services vendor. These e-mails report a potential problem with your account and tell you that you are required to confirm private information or details immediately. This confirmation asks for you to enter credit card data, Social Security numbers, account numbers and/or passwords.

These e-mails are not from the companies, but rather unscrupulous individuals with the sole purpose of ID theft and causing you economic distress.

According to Scamdex, a company that is an “Internet Scam Resource,” there are six typical Internet e-mail scams:

(1) Advance Fee Fraud: Payment is required to “‘release” some much larger amount, which is held by a third party.

(2) Lottery Scams: Payment is required to get your huge unsolicited lottery winnings transferred into your country and bank account.

(3) Phishing: Official-looking e-mails from large Internet banking and online services (PayPal, eBay, South Trust, US Bank, etc.), which ask you to confirm some details.

(4) Auction Scams: Simple scams using eBay or Craigslist to take your money, your property or both.

(5) Employment Scams: Employment is offered processing international payments. A certified check is paid into your bank account; then you deduct your “commission” and send on the rest.
(6) Financial/Investment Scams: Including High Yield Investment Plans, Ponzi schemes, fake “affiliate” schemes and Multi-Level Marketing scams – these are offers of huge unrealistic returns on investments, which turn out to be fraudulent, illegal or nonexistent.

Tips to protect yourself from e-mail fraud include:

(1) If the e-mail is in your “spam-catcher,” it has been sent to many others and is not an individual e-mail directed only to you. Good chance it is bogus.

(2) Be suspicious of any e-mail with urgent requests for personal financial information.

(3) Don’t EVER use the links in an e-mail to get to any Web page if you suspect the message might not be authentic.

(4) Call the company on the telephone, or log onto the Web site directly by typing the Web address in your browser or using your own bookmarked link.

(5) Avoid filling out forms in e-mail messages that ask for personal financial information.

(6) Always ensure that you’re using a secure Web site when submitting credit card or other sensitive information via your Web browser or provide it over the phone.

(7) If you have the slightest uncertainty about an e-mail — stop, ask for a second opinion by talking to family or knowledgeable friends.

(8) Check out reported scams on Spamdex.org.

If it sounds too good to be true, it probably is. Identity theft, credit card fraud and other schemes are more common than ever. Make sure you do not become a victim.

The Problem with Retirement Based Mutual Funds

By admin  |  2009/09/08 11:53 Posted in Financial planning, Investing, Retirement planning  |  Comments (0)

The question “What is the ideal mix of investments for someone retiring at 65?” is not a reasonable question to ask in the first place. It could be analogous to asking “What’s the proper medication for a person age 65?” or “What car should I have now that I’m 65?”

A number of investment companies have developed mutual funds that are designed based on answering the silly question. They are called target retirement date funds. The intent is to have the mutual fund company change the asset allocation to a more conservative mix, as a person gets closer to retirement.

One problem is each investment company has a different perspective as to what is a proper allocation at the various stages. Please note the differences for the follow 2025 target date funds for the following companies:

  • Vanguard - US Stock 61% Non US stock 15% Cash and bonds 23% Other 1%
  • T Row price – US Stock 60% Non US stock 20% Cash and bonds 19% Other 1%
  • Fidelity - US Stock 52% Non US stock 19% Cash and bonds 28% Other 1%
  • Putnam - US Stock 36% Non US stock 20% Cash and bonds 42% Other 2%

The main folly with this target date approach is that basing the allocation on a retirement date fails to address the underlying factors that should determine the proper allocation.

A client’s asset allocation in their portfolio should be based on three factors,

  • Risk tolerance (their mental ability to withstand down markets)
  • Capacity for risk (their financial ability to withstand down markets)
  • Goals (which would include their time frame)

Unfortunately all target retirement date mutual funds allocations are based solely on the date of retirement. This methodology target date approach fails to address the 2 major factors determining the proper allocation for that individual. The result could be more risk than the person should have in their investments.

Clients with at least $10,000 of investments are better served by having an allocation across different asset class custom designed for their situation.

The only situations where target retirement date funds might be appropriate is in a retirement account that has very few choices to construct an appropriate portfolio or the client has a very small amount of investments to work with or the client does not know where to go to get help to have the proper custom designed allocation.

Understanding Your Investment Costs

By admin  |  2009/09/02 10:35 Posted in Financial planning, Investing, Retirement planning  |  Comments (0)

In this low interest rate environment and with the stock market having tanked, saving a dollar can be easier than making one. Depending upon the size of your portfolio, cutting your investment costs could save you a bundle.

One client recently said, “What investment cost? I don’t pay any costs.” What he meant was that he did not know he was paying the costs. Most people do not know about the fees often associated with investments and their impact, so lets review.

Commissions are paid when many investments are purchased, and they can apply to individual stocks, limited partnerships and many mutual funds. Individual bonds usually have a markup that the client never sees.

When investors purchase mutual funds, many do not know that there are two primary types: those that pay commissions to the salesperson and those that do not, known as “no load.”

There are at least three different classes of commissionable shares. “A” class shares have commissions as high as 5 1/2 percent. “B” class shares do not have a commission upfront, but they have a backload that is deducted if you liquidate the fund in the first several years. They also have a higher annual cost than the “A” class shares. “C” class shares have no front-end commission and a limited one-year backend load (should you leave early), but they have higher annual expenses than the other two classes.

A “no load” fund will always provide a higher return than those paying commission (all else being equal) and should be considered the best type of choice.

Many mutual funds also have annual marketing or distribution fees and are considered an operational expense, which can be as high as 1 percent.

Keep in mind that every time a sale occurs when commissions are involved, there is a conflict of interest between what is best for the client and what is best for the salesman and the company. To avoid this situation, clients would be well-served to work with financial advisers who do not sell product.

Other fees that are often charged can include account fees, statement fees, wiring fees, distribution fees, redemption fees and account closure fees or management fees.

In this current financial environment, now is a great time to learn about what fees you pay and to trim your investment costs, thereby keeping more dollars in your pocket. Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek and AARP recommend readers go to www.garrettplanningnetwork.com or www.napfa.org for a list of “fee only” advisors in your area who can recommend investments that do not pay commissions.

NAPFA Launches Consumer Education Series to Help Americans Better Understand Personal Financial Issues

By admin  |  2009/07/08 12:12 Posted in Financial planning, General info, Investing, Retirement planning  |  Comments (0)

The National Association of Personal Financial Advisors (NAPFA), the country’s leading professional association of Fee-Only financial advisors, is gearing up to further educate people on a variety of topics in an effort to help Americans become educated consumers of financial planning advice and products.

The Consumer Webinar Series is a year-long initiative beginning August 7, 2009 that will provide an opportunity for anyone in the country to learn about a wide range of financial issues from NAPFA-Registered Financial Advisors.  Each month a new session will be conducted live online. Consumers can attend the live session after registering for free, or listen to an audio file after the program.  The instructors NAPFA has recruited for the various sessions are among the industry’s leaders in truly comprehensive financial planning and includes members of NAPFA’s National Board of Directors, past NAPFA national chairs, educators, and authors.

“Each session is intentionally designed to help attendees better understand a specific issue and why it is of particular importance to them,” said NAPFA National Chair Diahann W. Lassus, CFP®, CPA/PFS.  “We want attendees to take something away from the sessions that helps them tackle these issues at home.  As an industry we have done a poor job of helping consumers increase their financial knowledge.  This program, along with the successes of the Your Money Bus Tour, is NAPFA’s way of doing its part.”

The series will include 12, one-hour sessions delivered via the internet.  The individual sessions will be conducted from 1 to 2 pm Eastern time and will include:

August 7, 2009 –         Money 101: Knowing the Basics

September 4, 2009 –    Kids & Money

October 2, 2009 –        What is Financial Planning?

November 6, 2009 –    Protecting What You Have

December 4, 2009 –    Investments: The Basics

January 8, 2010 –        Investments: Advanced Concepts

February 5, 2010 –      Managing Your 401(k)

March 5, 2010 –          Leaving a Legacy

April 2, 2010 -             Women and Money

May 6, 2010 -              Financial Planning and Small Business Owners

June 4, 2010 -             Your Retirement

July 1, 2010 –              Financial Windfalls

Registration for the 2009 sessions is open now.  Learn more about the Consumer Webinar Series by visiting http://www.napfa.org/consumer/ConsumerWebinarSeries.asp

In addition to registering for the sessions, consumers can learn more about the topics and the NAPFA-Registered Financial Advisors who will be instructing the sessions.

“We hope people will take advantage of this opportunity to better themselves and their families.  Only through education will consumers be better capable of addressing their own financial situations,” added Lassus.

Members of the media who would like to learn more about the Consumer Webinar Series can contact Benjamin Lewis of Perception, Inc. at 301-963-7555 or Benjamin.lewis@perceptiononline.com.

About NAPFA

Since 1983, The National Association of Personal Financial Advisors (NAPFA) has provided Fee-Only financial planners across the country with some of the strictest guidelines possible for professional competency, comprehensive financial planning, and Fee-Only compensation.  With more than 2,100 members across the country, NAPFA has become the leading professional association in the United States dedicated to the advancement of Fee-Only financial planning.

For more information on NAPFA, please visit www.napfa.org.

Research Confirms: Now is a Time to be Investing

By admin  |  2009/07/08 09:56 Posted in General info, Investing, My soap box  |  Comments (0)

Recent research shows that investors who begin investing during bear markets do better over the long run than investors who begin in bull markets.  T. Rowe looked at four different thirty-year periods, two of which that started with bear markets (1929 and 1970) and two that began with bull markets (1950 and 1979). They looked at the difference in the outcomes for investors who contributed $500 a month over these periods.  They found, the investors who had begun investing in bear markets had much higher overall returns than the investors who had started investing in during a bull market. Keep in mind this is true for those who stay invested for a long time frame. Is more applicable to young investors then for retirees.

The stock market has always gone up with time but never in a linear fashion. There are times for a rapid increases as well as times when the market drops. Historically, the markets have always rallied and gone to new highs. As a result, purchasing mutual fund shares in a down time for the market is like buying things on sale. You get a great deal for the dollar. Whereas purchasing shares in a bull market is likened to paying top dollar for that item you just have to have now. There is less room for a continued rise and actually an increased chance for a short term fall in value. Just look at the tech boom a few years ago or more recently the housing market.

The best advice for investors is to not try and predict which way the market will go or what sector will be hot but to consistently invest in an appropriate asset allocation to fund your future goals.

The correct mix of investments should be based upon your risk tolerance (your mental ability to handle the ups and downs), your risk capacity (your financial circumstances, income, assets and liabilities), as well as your goals, which include your time frame.

If you Invest; There’s One Thing You Gotta Know

By admin  |  2009/07/08 09:54 Posted in General info, Investing, My soap box  |  Comments (0)

If you don’t know anything else about investing, the one thing that is paramount to know is the different legal safeguards and standards of care depending upon from whom you receive your financial advice.

You have three options for receiving investment advice:

1) Registered Investment Advisor (RIA). According to state and federal law anyone providing financial advice for a fee must be registered with his or her State or the federal government as a Registered Investment Advisor (RIA). These individuals are paid a fee by their clients for the advice and are called “Fee–Only” Advisors. They have a legal and ethical requirement to always do what’s in the client’s best interest and is known as the “fiduciary standard” which is based on 5 core principles;

  • Put the client’s best interest first;
  • Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
  • Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
  • Avoid conflicts of interest; and
  • Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

2) Broker Dealer Representative. Another alternative is to get advice from a broker dealer representative who earns commissions by selling products. Unfortunately, these salespeople’s legal duty and obligation is to their employer (a large for-profit corporation) and not to their clients. There is no fiduciary standard, only the requirement that the salesperson provide products that are suitable. This means if there are three suitable products paying commissions of 7%, 5% and 1% it would be legally permissible to sell the high commission product even thought it was not best for the client. KEEP IN MIND EVERY TIME A COMMISSION IS INVOLVED THERE IS A CONFLICT OF INTEREST BETWEEN WHAT IS BEST FOR THE CLIENT AND WHAT IS BEST FOR THE SALESPERSON AND THEIR COMPANY.

3) Duel Registration. Recently, some advisers are both a representative of a broker dealer (sell products for commission) as well as being an RIA and charging fees for advice. The problem with this situation is the client has an extremely difficult time knowing when the advisor is wearing the hat of a RIA with its fiduciary responsibility to always do what’s right or when the advisor is in fact operating under the lower standard of suitability during the selling process. This has become a greater problem since the federal courts struck down certain SEC guidelines. Many brokerage firms and banks now provide the option of “money management” and collect a fee for referring the client to a RIA to have their assets managed.

76% of investors surveyed did not know the difference in the methodologies and safeguards between using the services of a RIA and broker dealer. As a result, most investors pay more for their investment advice via the commissions and higher costs associated with using commission-based products than if they use the services of an RIA and the use of noncommissioned products.

The only way for you to know that the advice you’re getting is always in your best interest and you have the protection of the fiduciary standard is to use a Fee-Only advisor who does not sell product.

Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek, and AARP all recommend readers use “fee only” advisors who provide advise and do not sell products with the inherent conflicts of interest.

Reasons to Avoid Financial Advice At a Bank

By admin  |  2009/06/24 14:10 Posted in Beware - Horror stories, General info, Investing, My soap box  |  Comments (1)

In the good old days a bank was a bank. It was where you deposited your paycheck, had a savings account and got a car loan. Laws were changed (due to heavy lobbying by the banks) to allow them to sell investment and insurance.

Most banks now have a subsidiary company/partner that is a Broker Dealer (BD) and the financial advisors at the branches are employees of the BD.

Here are some reasons why it may not be in your best interest to buy investments from a bank.

1. All financial advisors in the banks have a legal loyalty to their employer not the client. They do not have a responsibility to disclose conflicts of interest, or to do what is in the client’s best interest. The only two requirements are to “know your customer” and provide products that “are suitable”. Suitable does not mean what is “best” long for the client but could be what is best for the bank.

2. Banks are publicly traded companies who answer to Wall Street. The Board of directors and CEO’s are charged with increasing stock value for the shareholders. The Board sets policy, which affects the products that can be offered for sale and what not to sell. Would it surprise you that they are more likely to approve high commission products and encourage sales?

3. Banks are under tremendous pressure to fatten up the bottom line. Increasing profits from the sale of investments and insurance is a quick way to do that in this low interest rate environment and that many banks must begin the repayment of the federal bailout money with interest. There is a lot of pressure to increase income. This can lead to the sale of products with higher commissions as well as inappropriate sales which is may not to be beneficial to the customer

4. Allowing investments to be sold in a bank has resulted in confusion for many clients. One client reported going to her bank to acquire a CD. When she expressed disappointment at the low rate she was directed to a financial adviser who sold her an Equity Index Annuity, which provided the bank and a representative with the commission of up to 7%. The client was not aware that she could not get all her money back without penalty for 10 years. The lady was 83 at the time.

5. There is a higher average turnover of financial advisers in banks then elsewhere. This can result in dealing with less experienced salespeople or those that have not been successful elsewhere.

6. The integrity and ethics of some banks can be questioned.

a. Wells Fargo was recently sued by the State of California for selling investments to clients as being safe when there was risk and failing to disclose the inherent risk. Other banks did the same thing but at least provided some form of restitution.

b. Bank of America was sued for involvement in a Ponzi scheme.

c. Bank of America sued for not disclosing the true facts related to the purchase of Merrill Lynch that resulted in the Government granting BoA 20 Billion and later to guarantee another 90+ billion.

d. Several banks recently went bankrupt due to poor management with the changes in the economy.

e. U.S. government’s stress tests results revealed that nine out of the 19 banks tested do not need additional capital including; B of A. wells Fargo and Citicorp

In reality, many of the same situations exist when dealing with for-profit corporations such as Morgan Stanley, Edward Jones, Smith Barney and other of broker-dealers.

A better option would be to use the services of a Registered Investment Advisor (RIA) who does not sell product. RIA’s have a legal fiduciary duty to disclose potential conflict of interest and to keep the clients interest foremost at all times. When there are no sales of product and no commission, there is no worry.

Do Not Stop Funding Your 401(k)!

By admin  |  2009/06/22 11:57 Posted in Financial planning, Investing, My soap box, Retirement planning  |  Comments (0)

Regardless of what’s going on in the economy and the stock market, do not stop funding your 401(k) accounts!

Most workers with 401(k) plans have viewed their retirement savings as having trickled away with the current stock market plunge.  In addition, 25% of US employers have or are planning to eliminate 401(k) matching contributions as a way to make it through these difficult economic times.

87% of those polled felt the companies matching feature was an important motivation for them to contribute to their 401(k).  Without the match, there’s less motivation to contribute.

These two facts have prompted some individuals to stop contributing to their 401(k), which is exactly the opposite of what they should do.

Income in retirement comes from Social Security, (which has some significant issues going forward), pension income (which most come is no longer offer) and from resources saved during one’s working years (401(k), IRA, Roth IRA Sep IRA etc.)

The 401(k) is a great way to accumulate retirement dollars because;

1.     The deposits a comes right out of the check and is deposited automatically,

2.     There is usually a good choice of investment types

3.     It is easy to administer

4.     You save current income tax.

Now is a crucial time to make sure that your investments within your 401(k) are appropriate for your risk tolerance, you risk capacity and your goals including timeframe.  Once you make sure you have the right allocation continue funding your 401(k) so that you’re more likely to have the retirement you envision.