A Risk Management Approach To Long-Term Care

Long-term care will first be defined, and then the problem of long-term care will be examined. The answer to the question of who should buy long term care insurance, and the evaluation of the long-term care insurance policy.

<p>A number of dubious marketing claims swirl around cash value life insurance (CVLI) which includes most any type of life insurance that has an investment component. I have previously addressed several CVLI myths: 1) that people necessarily have a permanent need for life insurance, 2) that CVLI is somehow &quot;permanent&quot; in nature despite the fact that the insurance component of CVLI tends to decline or even vanish over time, and 3) that even though people are often implored to purchase CVLI at a young age to lock in its cost, the cost of all life insurance tends to rise over time whether the premiums are fixed, or not.</p><p>Whereas term life insurance provides pure life insurance coverage with no savings component, the lower premiums associated with term life insurance reflect this reality. In contrast, CVLI policies generally require substantially higher premium payments &ndash; a portion of which remain inside the policy as a form of policyholder savings. It is these funds that the policyholder may borrow &ndash; usually at attractive rates of interest. Not surprisingly, insurance marketers make much ado about the flexibility of such policy loans. But, are they really a good deal for the consumer? Let&rsquo;s look more closely.</p><p>Because the savings component of a given CVLI policy exists only as a result of the higher premium payments made by the policyholder, the issue then centers not on whether a below-market rate of interest is a good deal, but whether the insurer ought to charge the policyholder anything at all. After all, if one were to purchase term insurance and put the resulting premium savings in one&rsquo;s own pocket, the interest rate associated with later pulling that money out of one&rsquo;s pocket would be precisely zero.</p><p>A low policy-loan rate is enticing until one realizes that the rate really ought to be zero.</p>

Term life insurance provides pure life insurance coverage with no savings component, the lower premiums associated with term life insurance reflect this reality.

Cash Value Life Insurance Policy Loans Not Such a Good Deal

Designating a Trust as a Retirement Beneficiary: Benefits & Risks

<p>Trusts have been around since the 1500&rsquo;s when English landowners used them to get free of creditors and feudal obligations.&nbsp; Today, of course, trusts are more comprehensive and complex, but used correctly, they provide the flexibility and control you want over your assets when you die.&nbsp;</p><h3>Choosing a Trust as a Beneficiary</h3><p>If you choose to name a trust as the beneficiary of an IRA there are some important considerations.&nbsp; If the trust qualifies as a &ldquo;see-through trust&rdquo;, the IRS permits the use of the oldest trust beneficiary&rsquo;s life expectancy for purposes of required minimum distributions.&nbsp; This is especially beneficial when the trust is for minor children. Since they most likely are significantly younger than you they can benefit from a much longer applicable distribution period.&nbsp; Indeed, they have the potential for decades of tax-free growth of your assets.</p><h3>Risks of using Trust as a Beneficiary</h3><p>However, using a trust to inherit an IRA poses several risks.&nbsp; First, the trust could wind up paying higher taxes than your heirs would, because trust tax rates are higher than most individuals&#39; rates.&nbsp; (The 35 percent tax rate kicks in on a trust when income exceeds $9,750, compared with $326,450 for individuals.) Second, the trust must qualify as a &ldquo;see-through&rdquo; trust.&nbsp; It is called a see-through (or look-through) trust because one is able to look through the trust to the beneficiaries named under the trust. The trust will not qualify if you have named beneficiaries that are not people, such as a charity, your estate or another trust.&nbsp; Since those entities do not have life expectancies, the IRS will not allow any of the beneficiaries involved to stretch out the withdrawals&mdash;even though that was your intention in setting up the trust.&nbsp;</p><p>Keep in mind when setting up the trust that if you are leaving IRA assets to a trust for a child, you need to determine who will receive the remaining trust assets when the child dies.&nbsp; If you designate a charity as the remainder beneficiary when the child dies the trust does not qualify as a see-through trust. A charity is not a person. If you name a person as the remainder beneficiary, the trust qualifies as a &ldquo;see-through trust&rdquo; but it is important to remember that the applicable distribution period is based on the life of the oldest beneficiary, including the remainder beneficiary.</p><p>Certain beneficiaries, however, may be disregarded when determining who the oldest beneficiary is, and if all beneficiaries are persons.&nbsp; For instance, you may disregard any beneficiary whose has taken full distribution of his share by September 30 of the year following the year of the IRA owner&rsquo;s death.</p><p>Another major consideration is the retirement plan you have.&nbsp; It must specifically offer the life expectancy payout. Because most 401(k) plans do not offer this payout, one of your first steps would be to roll 401(k) assets into an IRA that does.</p><p>Note that your will is irrelevant when it comes to your IRA.&nbsp; What matters is the IRA beneficiary form, which you are supposed to fill out when you open the IRA account.&nbsp; It, not your will, governs the way an IRA passes along to your heirs. If you do not name a beneficiary, or you name your estate, your heirs lose the ability to stretch their withdrawals over their lifetimes.&nbsp; In some cases, naming the estate as the beneficiary could even prevent your spouse from being able to roll assets into his or her own IRA. It is a good idea to review those forms periodically</p><ul><li>Additional requirements of a see-through trust are:</li><li>The trust must be valid under state law.</li><li>The trust is irrevocable, or will be, upon the death of the IRA owner</li><li>Beneficiaries of the trust who are beneficiaries with respect to the trust&rsquo;s interest in the IRA are identifiable from the trust instruments.</li><li>The IRA custodian must be in possession of the trust document and informed of any amendments.</li></ul><p>If you have considered using a trust but have concerns about the cost or that it might not meet the test for stretched withdrawals, a possible alternative is a <em>Trusteed IRA.&nbsp; </em>This method uses a combination of a trust and IRA in which the trustee can have responsibility for withholding payments from the beneficiary or making payments to a disabled beneficiary.&nbsp; Because of the greater flexibility in controlling distributions, this may be a viable alternative in many planning situations.</p><p>Inherited IRAs do not work like regular IRAs.&nbsp; So do not assume that any of the rules governing the IRAs you own would apply to any that you inherit. For example, if you inherit an IRA from anyone other than your husband or wife, you cannot roll it into your own IRA under any circumstance.&nbsp; You also cannot withdraw the assets from an inherited account and then deposit them into a new IRA and you cannot consolidate IRAs you inherit from different people into one account.</p><h3>Conclusion</h3><p>The good news is that traditional IRAs and Roths you inherit have one important thing in common with the ones you hold yourself:&nbsp; You <em>can</em> stretch out the withdrawals across your lifetime rather than taking them as a lump sum.&nbsp; Like the trust scenario above, this gives you a chance to postpone the tax bite and lengthen the time that tax-free earnings can accrue, possibly increasing your inheritance by thousands of dollars.</p><p><em>Provided by courtesy of Herb White, MBA, CFP,&nbsp; Principal and Managing Director of Life Certain Wealth Strategies in Greenwood Village, Colorado, </em><a href="http://www.lifecertain.com"><em>www.lifecertain.com</em></a><em>.&nbsp;Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member NASD, SIPC.</em>&nbsp;</p><p><br />&nbsp;</p>

It is very common for IRA owners to designate a trust as the beneficiary of the account. Read about the possible risks 7 benefits of designating trusts as a beneficiary.

Trust as IRA beneficiary

Incidental Financial Advice: What You Need To Know?

<p>On April 6, 2005, the SEC adopted what is known in the financial industry as the &ldquo;Merrill Lynch Rule.&rdquo; While it has not been widely publicized, this odd rule is something investors should clearly understand. It allows brokers at firms such as Merrill Lynch (where they&rsquo;re called &ldquo;Financial Consultants&rdquo;), Smith Barney, Dain Rauscher, etc., to escape the protections offered to the public under the Registered Investment Advisor Act so long as their investment advice is &ldquo;solely incidental&rdquo; to their brokerage services.</p><h3>Why would you engage a &ldquo;financial consultant&rdquo; for &ldquo;incidental advice?&rdquo;</h3><p>If you ask anybody why they do business with such firms, they will likely tell you it&rsquo;s because they feel comfortable that they will get competent advice at these brand name companies. The fact is, we do business with people, not institutions &ndash; and it&rsquo;s the people that we trust. To be sure, there are good competent folks working for these firms. Nonetheless, common sense says that anybody who holds himself or herself out as providing investment advice ought to be regulated as an investment advisor, just as those who promote themselves as providing medical advice ought to be regulated as a medical doctors.</p><p>There is no such thing as &ldquo;incidental financial planning&rdquo; &ndash; just as there is no such thing as &ldquo;incidental surgery&rdquo; or &ldquo;incidental litigation.&rdquo; &ldquo;Incidental Financial Planning&rdquo; is incomplete financial planning and it often does more harm than good. Either financial planning is being done properly and in the best interest of the client or products are just being peddled by a salesperson and it&rsquo;s &ldquo;buyer beware.&rdquo;</p><p>It is disappointing that the SEC refused to embrace what seems like clear logic. The Merrill Lynch Rule condones the practice of investment brokers holding themselves out as competent <a href=https://www.paladinregistry.com/financial-advisors-near-me>financial advisors</a> while escaping the higher standard of acting as a fiduciary. Apparently, the SEC&rsquo;s position is that much of the &ldquo;advice&rdquo; that is given by brokers is &ldquo;solely incidental&rdquo; to their primary function as an order taker for securities transactions, even though they advertise themselves as &ldquo;financial advisors,&rdquo; &ldquo;financial consultants,&rdquo; &ldquo;wealth advisors,&rdquo; etc. Does this ruling foster &ldquo;truth in advertising?&rdquo;</p><p>The Financial Planning Association stated in a written response to the SEC&rsquo;s decision: &ldquo;We believe that, at an absolute minimum, a consumer warning label is warranted given the confusion in the marketplace over who is a broker agent and who is a fiduciary investment adviser&hellip;&rdquo; and &ldquo;the approach taken by this rule will be a disservice to the public over the long-term if it only formalizes two different kinds of regulation for the same advisory service.&rdquo; A line in the sand has been drawn, and two distinct classes of financial professionals now exist &ndash; those that accept fiduciary responsibility and those that hide behind an exemption.</p><h4>Conclusion</h4><p>As for me, I accept the responsibility of being a fiduciary and of always putting my clients&rsquo; interests first. In the management of any assets entrusted to me, I will work in accordance with prudent investment practices. In other words, I pledge to manage my clients&rsquo; assets as carefully as I manage my own.</p>

There is no such thing as “incidental financial planning” – just as there is no such thing as “incidental surgery” or “incidental litigation.” “Incidental Financial Planning” is incomplete financial planning and it often does more harm than good.

Who Wants “Incidental” Financial Advice?

Making an Estate Check-Up a Multi-Generational Family Matter

<h3>Q&amp;A: Consider Making an Estate Check-Up a Multi-Generational Family Matter</h3><p><strong>&nbsp;</strong></p><p>Questionable estate planning has gotten some recent attention with the sudden death of actor Heath Ledger. The 27-year-old actor died suddenly this year with an older will that provided only for his parents and other immediate family &ndash; he never revised those documents to accommodate his young daughter or the child&rsquo;s mother.</p><p>Though Ledger&rsquo;s parents told the media that the daughter and mother would be fairly provided for, that&rsquo;s not the same thing as a solid estate plan that leaves nothing to chance. And if Ledger&rsquo;s death offers a lesson, estate planning should be done at the earliest point in your life that you start to gather assets and responsibility for others.</p><p>In estate matters, it&rsquo;s a good rule of thumb to review your plans every three years or whenever there&rsquo;s a material change in your family&rsquo;s lifestyle &ndash; a marriage, a divorce, a remarriage, the birth of children, the loss of an immediate family member or a major rise or fall in assets.&nbsp; Those are the biggies.</p><p>For individuals and couples with elderly parents and/or young kids starting out on their own, it might be smart to do a multi-generational estate checkup at the same time. Why? Because in families with significant assets or other pressing financial issues involving businesses or dependents, each generation&rsquo;s wishes for the dispersal of shared or personal assets should be documented legally and shared with all the relevant parties.</p><h4>Q: What are some of the multigenerational issues in estate planning?</h4><p><strong>A:</strong> In some families, this may mean the future of a multigenerational family business, perhaps one of the most complex estate issues any family will face. In others, the assets may consist mainly of cash, property and other investments, but similar problems can occur when all the parties aren&rsquo;t on the same page about who will get what.</p><h4>Q: What kind of problems can be prevented by multigenerational estate planning?</h4><p><strong>A:</strong> It&rsquo;s important to realize that estate planning isn&rsquo;t just about splitting up money &ndash; it&rsquo;s also about disaster planning. If a family hasn&rsquo;t planned for business succession, it&rsquo;s possible that other damaging secrets may emerge like problems in the business or significant debt the family might be liable for. Also, the sudden death or lengthy incapacitation of the head of a family may turn chaotic without proper health care or financial directives to manage the person&rsquo;s illness or the money and business issues that follow.</p><p>Multi-generational estate planning may not be the easiest thing in the world to accomplish given how families communicate &ndash; or don&rsquo;t communicate &ndash; about money. But such dialogue might be the smartest thing any family does together.</p><h4>Q: How does an estate plan support a family legacy?</h4><p><strong>A:</strong> Proper discussion, documentation and review of a family&rsquo;s assets &ndash; with the participation of the right legal, tax and financial planning advisers &ndash; can keep more of those assets in the family and working to the family&rsquo;s wishes. In the case of a family business, generations of family members have built careers there or might otherwise be depending on that income to live. Yet a business might not even be at the heart of an issue &ndash; families may also have foundations or other charitable activities they&rsquo;ve supported for years with a certain mission that those in charge don&rsquo;t want changed. More than a few families have imploded in ugly legal squabbles over these situations and more. The results can be lengthy legal battles with damaging tax consequences, a potentially unfair split of assets among relatives or simple mismanagement of those assets going forward.</p><h4>Q: How can estate planning fail?</h4><p><strong>A:</strong> Bad estate planning can happen in the wealthiest of families. It&rsquo;s not unheard of in the richest of families for the matriarchs and patriarchs to die or become incapacitated without proper wills or directives for their heirs. Every adult family member &ndash; young or old -- should commit to the creation of such documents and as appropriate have them written in a way that doesn&rsquo;t shipwreck the family fortune or mission, no matter how big or small it is.</p><h4>Q: What should be done about non-married family?</h4><p><strong>A: </strong>&nbsp;The Ledger situation is a good illustration of the potential for estate problems when couples are not legally married. That&rsquo;s why multi-generational planning should also address estate and child custody arrangements for unmarried heterosexual or gay couples who might or might not have done the appropriate legal planning necessary to secure the estates of their current or past partners and their heirs. At the very least, all family members should understand the need for such planning to avoid conflict later.&nbsp; As non-traditional families become more common, families need to be open to that discussion.</p>

In estate matters, it’s a good rule of thumb to review your plans every three years or whenever there’s a material change in your family’s lifestyle. Here is an example from legend Heath Ledger's life.

Heath Ledger:  Great Actor, Bad Planner

Who is a Portfolio Strategist? When do you need one?

<h3>Sports Analogy</h3><p>The analogy of sport teams and investment teams who both want to win are similar in many ways.</p><p>Imagine that you own a professional football team. As the owner you bring the financial resources and set the organizations goals and objectives. Your aspirations as the owner are to win a national title. After all, you are going to finance this team, why not finance a wining team.</p><p>Your job, as the owner of course, is to build a successful team that has the best chance of achieving your goals. This means that you and your manager need to find the right coach that can put together the best players to win as many games as possible. This coach will also have to adapt his strategy depending on which opponents he will play against.</p><p>As an investor looking to build your own wining game plan, you are in the same position as the team owner. You bring the money to the table and set the objectives. Your advisor,&nbsp; if you work with one, acts as the manager by providing the information you need to make smart decisions and by reporting the status of your teams development. If you invest independently you will also play the role of the manager. Either way, the coach that you will look for should be able to put together the best possible players in each position in order to maximize the full potential for your financial success.</p><h3>Coach as Portfolio Strategist</h3><p>In the investment world the coach is known as the <em>portfolio strategist. </em>As with a coach the<em> portfolio strategist </em>combines the right players [large cap, mid cap, international and domestic holdings], in the optimal combination for the greatest chance of success while adhering to goals, return objectives and risk tolerance constraints. Portfolio Strategists are an absolute key element that differentiates a good investor from a great investor. Large institutional investors like Exxon Oil, Teachers Pension Fund, University of Penn regularly employ the services of&nbsp; portfolio strategist to attained the best chances of success.</p><h4>Portfolio strategists have three key responsibilities that they undertake on behalf&nbsp;of their investors:</h4><p>1] Selecting asset classes in which to invest</p><p>2] Determining and maintaining the optimal mixes of those asset classes.</p><p>3] Selecting and monitoring investment managers.</p><h4>Portfolio strategist bring expertise and capabilities in three main areas:</h4><p>1] Substantial research across global capital markets.</p><p>For example, UBS Global Asset Management employs 450 investment analysts in 15 different countries to conduct research on asset class, risk management, and asset allocation strategies.</p><p>2] Asset allocation and portfolio strategies.</p><p>Devotion of tremendous resources to the study of asset classes and how they react to changing market conditions so as to make decisions on when to buy or sell an asset class [Should we continue to hold real estate as an asset class?]</p><p>3] A disciplined investment process.</p><p>Investment policy committees comprised of CFA&rsquo;s with decades of experience that follow a disciplined approach of value metrics.</p><p>Given the above factors, majority of investors believe that the power of an experienced portfolio strategist&rsquo;s disciplined investment philosophy is enormous. By having systems in place to develop efficient portfolios and reduce volatility, these professionals are able to produce more predictable returns on a year to year basis.</p><h4>Do you really need a dedicated portfolio strategist?</h4><p>Let us examine the above question closely.</p><p>Research tells us that most affluent investors want a portfolio strategist [see Exhibit A-1].&nbsp; Weather an individual delegates those duties to a Financial Advisor, a stock Broker or hire the services of a professional institutional strategist becomes the decision that most <em>need </em>to make.</p><p>Let&rsquo;s review the components of a portfolio strategist;</p><ul><li>Asset allocation</li><li>Assumptions of the future of asset class performance</li><li>Correlation of various asset classes</li><li>Using optimization technology effectively</li><li>Manager selection for each asset class</li><li>The need to react to changing market conditions</li></ul><p>Should one agree that the above components contribute to a more efficient portfolio then you are in essence asking yourself, &ldquo;who is most qualified to make these decisions?&rdquo;</p><p><strong><u>Exhibit [A-1]</u></strong></p><div><p>Services the affluent want from advisors.</p></div><p>Asset allocation&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;56.7%</p><p>Financial/estate planning&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 41.2%</p><p>Tax planning&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 23.5%</p><div><p>All others&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4.3%</p></div><p><em>Source</em>: Russ Alan Prince and Karen Maru File, <em>Cultivating the Affluent</em> [Institutional Investor, Inc., New York]</p><p>In the end, the implementation of a portfolio strategist becomes a important decision that will give you the greatest chance of success. Market research tells us that asset allocation is critical in the investment process. Some individual investors will find that they feel comfortable acting as their own strategist, wheras others will identify financial advisors with the focus and compacity to do a superior job. Most investors, however, are likely to be best served and maximize their chances of success by taking full advantage of benefits offered by dedicated portfolio strategists.&nbsp;&nbsp;<em>&nbsp;&nbsp;&nbsp;</em></p>

Portfolio Strategists are an absolute key element that differentiates a good investor from a great investor. Learn here the requirement of a portfolio strategist for managing your portfolio.

Do you need a portfolio strategist

How To Check Your Mutual Fund's Quality Score?

<p>Many of us are accustomed to reviewing specific criteria when selecting mutual funds for our portfolios. We commonly review things such as performance, volatility, asset class style, correlation to a benchmark index or peer group, expense ratio, top 10 holdings, etc.</p><p>These might best be referred to as &quot;quantitative&quot; factors and are obviously as helpful as historical data can be. But shouldn&#39;t we pay as much attention to the &quot;qualitative&quot; factors as well?</p><p>I&#39;m referring to characteristics of the mutual fund and its management team that indicate the overall attitude toward their investors and the degree of stewardship expressed through their actions.</p><p>This is becoming such a hot topic that the most recognized mutual fund rating service, Morningstar, has created its own &quot;Stewardship Grade&quot; and is attempting to apply it to all of the mutual funds in its rating universe. This new measurement was introduced last October with an initial list of 500 funds and assigns a rating from A (best) to F (worst) based on how a mutual fund scores in five key areas: regulatory issues, board quality, manager incentives, expenses and overall corporate culture.</p><p>For example, Morningstar commentary might include remarks about the following: Whether or not the mutual fund has run afoul of regulators in the past three years; How diligent the board is in controlling expenses; If the firm has a history of launching lousy funds; If there are conflicts of interest at the board level; If the manager&#39;s pay structure provides an incentive to act prudently or conversely, too aggressively; If the firm passes on economies of scale to its investors as the fund grows in size; and Whether or not the firm has a thorough understanding of its role as a fiduciary.</p><p>I&#39;ve reviewed several of these reports in the past year and find the commentary to be very helpful and insightful. These ratings should not be looked at in isolation or as the only factor to consider when making an investment decision, but they certainly can provide a confirmation to other research prior to buying or selling shares.</p><p>Another service that I find very useful is the Mutual Fund Analyzer, which was created by the Center for Fiduciary Studies and is available to financial advisers by subscription. This tool is more quantitative than the Morningstar commentary, but uses Morningstar statistical information. The screens then are built on proprietary fiduciary due diligence data and rate factors such as: Minimum track record of fund management; Assets under management; Stability of organization; Consistency of holdings with stated management style; Correlation of style with peer group; Expense ratio; Performance relative to assumed risk; and Performance relative to peer group.</p><p>The Center for Fiduciary Studies has some guidelines regarding the appropriate parameters to set when screening for suitable funds, but ultimately leaves the decision up to the adviser. This can be a very useful tool when trying to narrow the large universe of funds to something more suitable for portfolio construction.</p><p>So, how many mutual funds achieved passing or acceptable scores in the latest review (quarter ending June 30) by the Center for Fiduciary Studies? Out of 16,303 funds rated, 1,689 funds, or 10.36 percent, received an acceptable score.</p><p>These new tools, while not perfect, attempt to offer some insight into the intangibles that may affect your overall portfolio performance. I&#39;m glad to see these resources made available to investment professionals and private investors, and the mere fact that they exist should serve to focus the attention of fund managers and boards on the issue of stewardship and fiduciary responsibility.</p>

Learn about the qualitative characteristics of the mutual fund and its management team that indicate the overall attitude toward their investors and the degree of stewardship expressed through their actions.

Check Your Mutual Fund's Score

Just Say No to Annuities!

<p>Americans own over $1.7 trillion in annuities, and I doubt that many have a clear idea of what they have purchased or how bad of a deal they actually received. The vast majority of financial firms that offer annuities and &ldquo;financial advice&rdquo; are not offering unbiased advice. These biased &ldquo;Wolves&rdquo; that go by the names of financial planners, brokers, or banks are nothing more than greedy salespeople. They tell you how they will do wonderful things for your portfolio, reduce your taxes, and help you save for retirement. In reality, their advice predictably leads to a solution where they peddle the product on which they are paid the highest commission &ndash; annuities!<br />Annuities are bad deals for 99% of people, and you should Just Say No! For example, only about 1% of variable annuities are purchased directly by consumers1. The rest are sold through brokers, insurance agents, and bank employees. Annuities are not bought, they are sold by unscrupulous Wolves that attempt to scare and confuse investors.</p><h3>How Annuities Work</h3><p>An annuity is an insurance contract that lets investors set aside money which ideally builds up slowly over time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. The annuity&rsquo;s first phase is the accumulation phase and the second phase is the withdrawal phase (know as annuitization).</p><p>In the accumulation stage, you give money to an insurance company either all at once or in a series of payments, and it earns a rate of return. The rate of return may be fixed in advance in what is called a fixed annuity, or the return may vary in what is referred to as a variable annuity. Variable annuities are pooled investment accounts (similar to mutual funds) wrapped in an insurance contract. The return is entirely dependent on the earnings of the investment pool. With fixed annuities, the insurance company declares a rate that they will pay, and the investments become general obligations of the company. The company invests the funds in one or more bond portfolios and the return is loosely related to the performance of the bonds.<br />In the withdrawal phase, you receive regular payments (usually for the rest of your life). The payments can also be set in advance, or they can depend on investment performance.</p><h3>How Annuities Can Take a Big Bite Out of Your Retirement Nest Egg&nbsp;</h3><h4>Annual Costs:&nbsp;</h4><p>Not only are annuity sales one of the highest profit areas for insurance companies, but they pay some of the highest commissions in the securities business. The only way that they can both make so much money and pay such high commissions is by assessing exorbitantly high fees to investors. The average variable annuity costs the investors approximately 3.02% per year, and the average Fixed Annuity costs the investor 2.32% per year. This statistic may not seem significant. However, when you compare annuity expenses to mutual fund and index fund expenses, saving a few percent per year can be the difference between having 2-4 times more money over your investing lifetime (see Exhibits 1&amp;2).</p><p><strong>How Much the Wolf is Paid:&nbsp;</strong></p><p>Inhibiting transparency, commissions on annuities are not itemized for investors. The typical annuity salesperson is paid 5.0% - 5.5% of the amount invested (and some are paid up to 14%)2. I have never seen a prospectus for an annuity that clearly explains the full extent and implication of these costs.</p><p><strong>Surrender Charges:</strong></p><p>If you buy an annuity and then want to get out of the contract, you almost always pay a big fee. Most companies charge a surrender fee (which decreases over time) starting around 7% - 8% of your annuity value. In some instances these surrender charges can be as high as 17%!</p><p><strong>Nothing for the Kids:</strong></p><p>Life long annuity payments usually end when you die. If you &ldquo;annuitize&rdquo; and then die, all of your annuity investments and gains go to the annuity company &ndash; your family gets zero. You can buy extra insurance to get 10 or 15 years of payments &ndash; but this is a big extra expense.</p><p><strong>Tax Treatment:</strong></p><p>To hear a Wolf pitch an annuity, you would think that these were great tax shelters. The truth is that the tax benefits are oversold, and since the tax laws changed in 2003, annuities are more heavily taxed than other investments. Investment gains on annuities are deferred until withdrawals begin, and then they are<strong> taxed at the ordinary income tax rate (10%-35%)</strong>. In contrast, a long-term investment outside of an annuity (like in stock) is only taxed at the capital gains and dividend rate of 5%-15%. Additionally if you die before youannuitize, annuities are terrible for your heirs. The entire annuity gain is subject to ordinary income tax when you die (there is no step-up in basis).</p><p>Annuities in Qualified Plans: There is no justification for using an annuity inside a qualified plan. The qualified plan itself provides the deferred tax advantage, and the only thing that an annuity provides is addition costs. If a salesperson suggests that you purchase an annuity inside one of your IRAs, 401(k)s, or pension plans, then it is clear that this Wolf is not looking out for your best interest &ndash; RUN! And, shame on that salesperson!</p><p>Guarantees and Promises: Wolves love to say that annuity payments are guaranteed. The fact of the matter is that they are not There are no guarantees in life and annuity &ldquo;guarantees&rdquo; are lot a weaker compared to other investments. An insurance contract is only as good as the insurance company that stands behind it. What do you think has a better chance of surviving over the life of a 30-year annuity period: the US Government (Treasury Bonds), the US economy (S&amp;P500 Index), or a single insurance company?</p><p>Overpriced and Worthless Insurance: If you die before you start receiving payments from your annuity, most variable annuities include a feature that insures you get back at least as much as you originally contributed. This is worthless, because less than one-half of one percent of annuity contracts are terminated due to death or disability. Most of these terminated contracts are worth at least as much as was contributed.</p><p>Purposely Complex: Companies selling annuities intentionally make their products complex, confusing, and slightly different than their competition. For example, there are over 900 unique variable annuity contracts currently offered in the market. By making things so complex, they hope to make it difficult for you to compare products. Payouts among similar annuity contracts vary by as much as 50%, because it is so difficult to price compare.</p><p><strong>The Wolf&rsquo;s Tales &ndash; Enticing Stories You are Told, Before Your Nest Egg is Eaten</strong></p><p><strong>Wolf:</strong> &ldquo;Annuities are better retirement investments than mutual funds.&rdquo;</p><p><strong>Truth: </strong>Higher fees, surrender fees, ordinary income tax rates, and more restrictions make them inferior (see Exhibits 1&amp;2).</p><p><strong>Wolf: </strong>&ldquo;Annuities have a guaranteed death benefit. So, your basic investment is protected.&rdquo;</p><p><strong>Truth:</strong> They are deceptively using the word &ldquo;guarantee.&rdquo; Further, the best way to protect your investment is to have lower expenses. If you need insurance, then just buy insurance!</p><p><strong>Wolf:</strong> &ldquo;At a certain age, you can convert your money into a lifetime income stream that you will not outlive.&rdquo;</p><p><strong>Truth:</strong> Inflation poses the biggest risk when you take a fixed annuity payout. For example, someone who bought an annuity paying $1,000 at the start of 1970 saw the payment value erode to $402 after 10 years and to $253 after 20 years. It is not easy paying the bills during retirement when your inflationadjusted income has gone down by 75% in 20 short years.</p><p><strong>Wolf:</strong> &ldquo;Look how much better our deferred fixed annuity rates are compared to bond rates.&rdquo;</p><p><strong>Truth:</strong> Many deferred fixed annuities are sold with higher-than-market teaser rates. These seemingly high rates generally last one year and then tumble.</p><p><strong>Wolf: </strong>&ldquo;We can give you a special &lsquo;bonus credit&rsquo; where we will add 5% to the amount you invest with us! We can even give you this &lsquo;bonus replace your current annuity.&rdquo;</p><p><strong>Truth</strong>: Annuity companies do not give out free money. When they give a bonus they also increase the expenses so that they get their 5% back in a few years, and then they make even more money by continuing to charge the higher fees.</p><p><strong>Wolf: </strong>&ldquo;100% of your money goes into the annuity on day #1. The commission I receive comes from the insurance company.&rdquo;</p><p><strong>Truth: </strong>Commissions on annuity products are built into the costs of the product. Any commissions paid to the Wolves are taken out of the annual fee you pay.</p><p>In conclusion, less than 1% of annuities are sold for legitimate uses that are truly in the best interest of the investor. In fact, some 60% of variable annuity sales are placed within IRAs and other tax deferred accounts! I think you know my opinion about annuities. If you have one, you may want to consider how you can escape. Do not be talked into buying one &ndash; Just Say No!</p><p>(c) 2006 Marathon Strategic Advisors, LLC</p>

Annuities are bad deals for 99% of people, and you should Just Say No! For example, only about 1% of variable annuities are purchased directly by consumers.

Investment Mentality Types: How To Build Best Investment Mentality?

<div>From my nearly twenty years of professional experience in advising clients, I have found that similar to the way individuals think with either the left or right side of their brain there are investors whose thinking supports either a &quot;risk driven&quot; or a &quot;return driven&quot; mentality when evaluating their personal investments.</div><h3>Characterstics Of &quot;Risk Driven&quot; Investors</h3><ul><li>Typically are risk averse and overly cautious</li><li>Would prefer to avoid risk even though they know their money will not otherwise grow</li><li>Not overly concerned when they are slightly underperforming during the up markets</li><li>Have long memories and can tell you the exact dollar amount lost during the last market decline, even if it was minimal compared to the overall market</li><li>They will sell out of positions that have grown significantly even if there is still upside potential</li><li>As a car owner they might purchase a Volvo and still feel unsafe; as a driver they drive at the speed limit or below to ensure they arrive safely.</li></ul><div><h3>Characterstics Of &quot;Return Driven&quot; Investors</h3></div><ul><li>Typically seek&nbsp;the highest investment return, without considering the underlying risk</li><li>Feel uncomfortable with investments they perceive as growth prohibiting, such as fixed income</li><li>Become concerned when markets are rising and they are underperforming, even slightly</li><li>Have short memories and tend to forget that investments are inherently risky</li><li>As a car owner&nbsp;they might purchase a Mustang and forego certain safety features to ensure maximum performance and speed.</li></ul><div>The investment approach we advocate won a Nobel Prize for its research which has consistently proven that, over time, there is a risk and reward relationship when investing. The ability to quantify this relationship helps risk driven investors make intelligent choices on how much risk they can tolerate in hopes of achieving a higher rate of return. When the market falls, however, many of these individuals will fall into panic mode even if the drop is small relative to the markets. For return driven investors quantifying risk may initially be helpful. However, when markets rise their short term memories will take over, they will revert to their natural tendencies and have the urge to forego conservative bond and cash investments in hopes of maximizing their returns.</div><div>&nbsp;</div><div>For both types of investors, it&rsquo;s important to emphasize that a superior investment approach is to &#39;win by not losing&#39;. In other words, if you capture most of the market&#39;s returns on the upside, this allows the portfolio to grow over the long term with strong results; and with more risk comes potential for higher returns. Most important, however, is that during the down markets a portfolio does not decline as much as the broader market and will have less to &quot;catch up&quot; when markets again return positive results. By way of example, a 50% decline requires a 100% return to break even. This was the exact scenario that played out from 2000-2002for investors who were not structured in a portfolio that was consistent with our Nobel Prize winning approach. &nbsp;The following chart shows the performance of a diversified portfolio with a traditional allocation (75% equity/25% bond) compared to the S&amp;P 500 Index, one of the most common gauges for measuring the stock market:&nbsp;</div><div>&nbsp;</div><div>Occasionally a diversified portfolio will underperform a broad market index. In 1998, for example, the S&amp;P 500 Index increased 28.60%, predominantly propelled by irrational returns from a small sub-set of technology stocks. Subsequently, in 1999, this sector of the market received the largest inflow of investment ever seen, fueled by both amateur investors who followed the herd mentality of the time, as well as by seasoned investment managers who buckled into the demands of their shareholders. The following period from 2000-2002 the Index dropped 43.10%, cumulative, one of the worst declines ever recorded in market history. Even now, almost eight years later, the Index has not returned to the high levels observed during March 2000. By comparison, a well structured portfolio with substantially less volatility &ldquo;won by not losing&rdquo; by mitigating declines from 2000-2002 and then returning all that was lost before 2003&nbsp;came to an end. Furthermore, it continued to add value the remainder of 2003, 2004, 2005, 2006 and&nbsp;year to date 2007!</div><div>&nbsp;</div><div>A well structured diversified portfolio may occasionally have to endure significant underperformance, such as in 1998, and may even lead many to question whether this is a valid approach to investing. The following chart, however, should remove any doubt that it is unwise to abandon a time tested approach. Despite occasional underperformance, a diversified portfolio will outperform indices over the long run. Using the returns from the prior chart, the illustration below tracks the growth of a $1,000,000 investment during the period from 1998 through November 2007 had it been invested in a diversified portfolio compared to the S&amp;P 500 Index:</div><div>&nbsp;</div><div>Given that the S&amp;P 500 Index represents a 100% allocation to equities, is market capitalization weighted and can experience periods of prolonged weakness, one might assume that this higher risk would provide a higher rate of return over the period. This has been proven time and again not to be the case and helps to clarify that higher risk does not guarantee better returns. A diversified portfolio allows for greater wealth accumulation over the period versus large swings in value, thus increasing the portfolio by an additional $334,403 and providing 19% more added value while subjecting the investor to less risk!</div><p>&nbsp;</p><div>Presently, many investors are again being enticed by the positive investment returns being posted by equity indexes, at a time when economic fundamentals are clearly deteriorating, In the meantime, actions by the Fed, such as the recent cut in interest rates, will only postpone what is an inevitable part of the economic cycle. Furthermore, the longer it takes for the markets to recognize that a recession is looming, the louder the pop will be of the proverbial&nbsp;bubble. Many may be tempted to concentrate portfolios in areas of the market that have posted the most recent strength and abandon the more conservative positions which do not perform as well during these environments. As a fiduciary, however, we are required to act in the best interests of our clients, and we can not justify a &ldquo;full steam ahead&rdquo; approach at this time. To do so would correlate to a driver disposing of his brakes, airbags and insurance simply because he has driven down an open highway&nbsp;for a full day without needing them.</div><div>&nbsp;</div><div>Finally as a reminder to all investors, whether risk driven or return driven, it is important to keep perspective when evaluating returns. The details of investment results should be evaluated to determine whether one is playing &lsquo;catch up&rsquo; or if added value has been experienced. If one underperforms the market slightly on the upside, it is irrelevant as long as they have protected the values on the downside. We have seen investors who had to return to work or defer their plans for retirement because of losses experienced in their portfolios. However, not squeezing out the most of every up market has never prevented a client from reaching any of their goals.</div><div>&nbsp;</div>

What is Investment mentality? Learn the types of investment mentali.ty & how to develop the best type of investment mentality

What is your investment mentality?

Is Your Advisor Double-Dipping?

<p>Once upon a time the commission rates charged to investors for securities trades were fixed by regulation. On May 1st of 1975, however, commission rates were deregulated and the competitive juices within the brokerage industry began to flow. In what has later become known as May Day, the deregulation of commission rates has ushered in a number of changes within the investment industry over the past few decades &ndash; most good, but some bad. Let&rsquo;s start with the good.</p><p>With brokerage firms suddenly forced to compete on price, commission rates have been driven progressively lower. Eventually, the concept of the discount brokerage firm, where brokers execute transactions without offering any investment advice, was born. To offset the reduced revenues brought in by ever-declining commissions, brokerages were forced to offer more products and services to remain economically viable. Today, the array of products and services offered by the typical brokerage firm is mind-numbingly large. On balance, the expansion of services has been a good thing.</p><p>As the investment landscape has become more competitive, however, brokerage firms have tended to migrate away from traditional, commission-based services in favor of fee-based services. However, since a huge variety of commission-based products has already been developed, the temptation to continue to use these higher-cost products remains &ndash; whether a given investor might be paying a separate investment management fee, or not.</p><p>So while brokers often have the choice between pursuing commissioned sales, or fee-based revenues, some do both &ndash; at the same time. For instance, if a broker were to manage a portfolio for an investor in exchange for a separate investment management fee of 1% per year, one might assume the broker would then steer clear of high-cost, commission-based products. That would be a dangerous assumption because as long as the broker discloses the fact that he might charge a separate management fee and accept commission payments from commission-paying products, the broker is good to go.</p><p>Aside from the fact that such &quot;double-dipping&quot; may be an adversarial business practice, the problem is that the disclosures to the consumer are often written using a fair degree of legalese &ndash; which increases the odds that the typical consumer won&rsquo;t really &quot;get&quot; what is being disclosed. If you&rsquo;re paying a separate fee for investment advice and you want to make sure your broker is not also selling you higher-cost, commission-based products, ask him or her to put it in writing&hellip;in plain English.</p><p>&nbsp;</p>

An example of double dipping would be an advisor purchasing a front-end-load mutual fund that pays a commission and puts it into a fee-based account that also will pay the advisor

Articles for Investors

Investor Tools

Read our tips.