Thinking Beyond Numbers

Take from Press Release I received recently. Should be required reading.

On April 25, 2012, Rep. Spencer Bachus ofALand Rep. Carolyn McCarthy of NY introduced a bill which, according to the accompanying press release, would enhance consumer protection in light of the 2008 market meltdown that took the U.S. economy to the brink of collapse, and the Bernie Madoff scandal.

The solution: expand the regulatory authority of the organization that currently regulates Wall Street brokers.  Make all who give investment advice answer to the organization that allowed Wall Street to sell trillions of dollars of toxic mortgage pools and derivatives, and which once had Bernie Madoff sit on its board of governors.

In other words, create a world where all advisors become brokers, and eliminate consumer access to independent, objective advice.

The Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012, talks about enhancing the protection of financial consumers by allowing the Securities and Exchange Commission to delegate its oversight of many thousands of independent registered investment advisors to a self-regulatory organization.  As many press reports have pointed out (see links below), the self-regulatory organization would be the Financial Industry Regulatory Authority (FINRA), the regulator that oversees Wall Street, and which has Wall Street executives sitting on its board of directors.

FINRA is the same organization that was in charge of policing Wall Street when the 2008 scandals broke.  Bernie Madoff was under FINRA jurisdiction for his entire career (including its predecessor organization, the National Association of Securities Dealers or NASD), served as a member of the board of governors of the NASD in 1984, and on numerous committees.  His brother and business partner, Peter Madoff, was elected vice chairman of the NASD in November 1992.

We do not support handing over expanded regulatory authority to an organization that failed to prevent the flood of toxic mortgage pools, the sale of derivatives and sat by unconcerned while the Madoff Ponzi scheme continued for decades.

The real agenda of the bill is very clear: to give Wall Street (through its regulatory arm) control over its most persistent competition: independent advisors who, in contrast to the Wall Street sales culture, put the interests of their clients first when giving financial advice.  At a time when Wall Street’s credibility is at its lowest ebb, when consumers are walking away from the opportunity to send their retirement dollars into the bloated brokerage industry bonus pools, the preferred solution is not more transparency, not changing the culture to put the consumer’s interests first, but to create a new regulatory overlay on the competition and bury it in paperwork.

In fact, when the Boston Consulting Group evaluated the expected cost of FINRA regulation on registered investment advisors, it concluded that the cost would be $51,700 a year in additional expenses for the average independent advisor.  This is more than twice as much as it would cost to develop enhanced oversight by the Securities and Exchange Commission.  (See the link below for more detail on the numbers.)

There are other ways to estimate the cost differential.  FINRA (as mentioned earlier) is not exactly transparent about its salary structure, but public records show that current SEC chairperson Mary Schapiro’s base salary as FINRA CEO came to $3.2 million a year–plus a $9 million bonus payment she received when she left to join the SEC.  (We only know this because a number of news outlets filed Freedom of Information Act requests that were vigorously resisted before the data was finally handed over.)

Schapiro’s current salary at the SEC: $163,000 a year.  If we simply compare that with her base salary at FINRA, without including the bonus, it would appear that FINRA regulation would be a remarkable 19 times more expensive than the SEC as a regulator of RIA activities.

There is reason to think this is a low estimate.  In 2009, FINRA collected over $700 million in regulatory fees, user fees, dispute resolution fees, transparency services fees, and contract services fees.  In the same year, FINRA’s leadership used the dues collected from its members to pay its top ten executives $11.6 million, to spend over $1 million lobbying Congress and the SEC (do regulatory organizations engage in lobbying activities?), and to spend undisclosed amounts on advertisements in The Washington Post and on CNN touting its record as a regulatory body.  In 2008, eight FINRA executives received more than $1 million in compensation and benefits, and the top 12 most-compensated employees received more than $24.8 million.  One might fairly question the organization’s rigorous stewardship of dollars allocated to regulatory efforts.

In addition, consumers and members of the press might be astonished at how little transparency FINRA operates under.

To take a recent example, just last year, Amerivet Securities president Elton Johnson (a former Green Beret) managed to get seven proxy votes onto the agenda at FINRA’s 2010 annual meeting.  These initiatives would, among other things, have required FINRA to do things that any guardian of the public interest would normally do as a matter of course: tell us the compensation paid to its ten most highly-paid employees, disclose FINRA’s investment transactions to members and the public, and open up its board meetings or at least provide transcripts of the discussions among Wall Street executives and others who currently (this, to me, is amazing) make the organization’s decisions in secret.

All seven of these initiatives passed overwhelmingly, garnering more than two-thirds of the membership vote, some more than 80%.  The FINRA board of directors debated these measures in a closed meeting, and decided to reject them.

There may be significant conflicts of interest in the way this legislation was crafted and produced.  It has long been clear that Rep. Bachus speaks as a proxy for FINRA on the subject of “enhanced” regulation, and I don’t think anybody close to the profession can see this as anything but a way to let FINRA take over regulation of the fiduciary RIA profession.  The press release accompanying the legislative proposal goes so far as to praise the diligent regulation of broker-dealers and the lax regulation of RIAs.  I think this one line offers particular insight into where this legislation is coming from:

“Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments.  For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,” concluded Chairman Bachus.

In other words, the RIAs, who are required by law to live up to a fiduciary standard (and put their clients’ interests first in all advice-giving) are the bad guys in the marketplace, who must be watched much more vigilantly, while the brokerage firms (which have resisted registering their brokers as RIAs and thus evading this tougher standard behavior) are the good guys who protect consumers.

This, of course, is taken straight from the mouths of FINRA and SIFMA (the brokerage industry’s lobbying group), and it is not hard to find out why this particular legislator has been so persistent on this subject.  When you look up where the lobbying money has gone, you find that Rep. Bachus’s top ten contributors include commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and “miscellaneous finance” ($89,250).  In the 2011-2012 election cycle, he was the number one fundraiser from commercial banks, from finance/credit companies and from mortgage bankers and brokers.  (All of that can be found here: http://www.opensecrets.org/politicians/industries.php?cycle=2012&cid=n00008091&type=I&newmem=N)

Beyond that, Rep. Bachus has been accused of a peculiarly Wall Street crime: insider trading (see link below).

When you connect the dots on this piece of legislation, it becomes frighteningly clear that the actual agenda is something very different from consumer protection.  Yet unless the public learns about this power grab by Wall Street just a few years after it brought the economy to its knees, consumers may find themselves living in a world where everybody who gives investment advice is a broker, and regulated like one.

The SRO would be FINRA: http://www.financial-planning.com/blogs/veres-sro-sec-finra-2678577-1.html

http://www.investmentnews.com/article/20120425/FREE/120429948#

The excessive cost of FINRA regulation:  http://www.fa-mag.com/fa-news/9412-rias-back-sec-as-regulatory-body.html

http://www.financial-planning.com/news/finra-sro-napfa-2678574-1.html

FINRA’s regulatory effectiveness (or lack thereof): http://registeredrep.com/advisorland/opinion_finra_is_an_ineffective_regulator_1006/

FINRA’s lack of transparency at the board level: http://www.dailymarkets.com/stock/2010/06/22/finra-owes-america-answers-on-these-proposals/

http://newsandinsight.thomsonreuters.com/Legal/news/2011/02_-_february/court_refuses_to_dismiss_lawsuit_demanding_finra_transparency/

Rep. Bachus insider trading scandal: http://www.washingtonpost.com/politics/rep-bachus-faces-insider-trading-investigation/2012/02/09/gIQA21Ui2Q_story.html

Do brokerage industry representatives actually sit on FINRA’s board of governors?  Here’s a list of the current board of governors: http://www.finra.org/AboutFINRA/Leadership/P009756  Among others, you find representatives of Morgan Stanley Smith Barney, LPL Financial, Deutsche Bank and Edward Jones.

But look more closely at some of the “public” members of the board of governors.  John Schmidlin, who is listed as a member of the consuming public, is the former chief technology officer and managing director at JP Morgan Chase (http://www.harlemacademy.org/about/board-trustees).  Richard S. Pechter, another member of the consuming public, is actually former CEO of Donaldson, Lufkin & Jenrette, and chairman of the board of Credit Suisse USA.  (http://investing.businessweek.com/research/stocks/private/person.asp?personId=12665753&privcapId=165284&previousCapId=23021&previousTitle=SONY%20CORP-SPONSORED%20ADR)   Kurt Stocker was chief Corporate Relations Officer of Continental Bank Corp.  (http://investing.businessweek.com/research/stocks/people/person.asp?personId=11713969&ticker=NYX:US&previousCapId=3777896&previousTitle=Rensselaer%20Polytechnic%20Institute )  “Public” governor William Heyman is the former Chairman of Citigroup Investments, and Executive Vice President of the Travelers Companies.

photo credit: Andres Rueda

Many of us of us struggle to keep up. Often times finances are the last thing on our minds until there is a problem with them. This is part of a series of articles written to help you Organize Your Finances. As other articles come out, you can find them by clicking on the Organize category, or Organize Your Finances tab at the top.
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The first step in organizing your finances is to determine what it is you’d like to accomplish. You can read about Setting Goals and Keeping Goals on previous posts. After your goals are set, you need to take a good look at your cash flow so that you can figure the steps necessary to fund your goals. I suggest doing this in 3 steps:

1. Figure out how much you are spending.
2. Figure out how much you earn and pay in taxes.
3. Subtract your expenses and taxes from your income for your discretionary income.

A friend and colleague of mine, Ken Weingarten, recently was interviewed by the Wall Street Journal for their annual tax special. He makes some great points about 4 HUGE changes coming in the way of taxation for investors next year.

The changes include an increased capital gains tax rate,  increased qualified dividend tax rates, increased top marginal income tax rates, and a Medicare Surtax of 3.8% on unearned income for taxpayers earning more than $250,000. All of these changes should impact how and where you invest the different portions of your portfolio.

For more on this topic, read my blog article Advance Tax Deferral.

photo credit: kevin dooley

Many of my readers know that I am an advocate for clearly communicated, transparent fees. I’ve tried to enlighten my readers from time to time on some of the Hidden Fees in Investing. I recently came across an e-column from a newsletter I get that I simply have to share. It will definitely clarify some of the many conflicts of interest in Broker Dealer compensation.
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The financial advisory profession has recently created two pretty good videos that illustrate the conflicts of the agency/brokerage/wirehouse advice model.  One, produced by Hightower Securities (which actively recruits brokerage teams) compares brokers to butchers and fiduciaries to dieticians; the one sells you a choice cut of meat, the latter sells advice on a healthy diet.  Don’t ever ask the butcher if you really need a juicy pork chop in your diet.  (You can find the video here: http://www.youtube.com/watch?v=Dg5RRMAc1GY)

The other video was produced by Greenspring, which is a fee-compensated advisory firm I probably should be familiar with, but am not.  The video explains certain conflicts built into the brokerage compensation model, and why they provide incentives for a broker to make recommendations that may not be in the customer’s best interests.  You can find the video at http://greenspringwealth.com/greenspring-u/webinar/the-conflicted-world-of-financial-services/, and tables showing various brokerage compensation structures (fascinating reading in their own right) can be found here: http://www.onwallstreet.com/ows_issues/2012_3/annual-compensation-rankings-2677458-1.html?zkPrintable=1&nopagination=1.  Be sure to scroll to the bottom, where the magazine provides the actual payout grids, plus interesting tidbits like the fact that Merrill brokers won’t get paid for advising any accounts under $250,000 in size unless at least 80% of their accounts are that large or larger, at which point they CAN be compensated for servicing customers who bring in those measly $100,000 accounts.

You also see the quota system on sales: Morgan Stanley brokers who have been with the firm for nine or more years have to produce at least $300,000 in sales or they’re put on probation.  A company spokesperson says that the firm’s previous $250,000 quota was lower than the industry average, so the firm decided to come inline with everybody else.

As the Greenspring video makes clear, the system is most conflict-ridden when an advisor is close to reaching a higher payout level–when, say, the Merrill Lynch advisor has made $280,000 in commissionable transactions or brought in asset management dollars that generate this level of total compensation (gross dealer concessions) as of mid-December.  At that production level, he stands to make 35% of the total, which comes to $98,000, while the firm takes the rest for overhead, expenses and those amazing executive bonus pools.  But if that broker can get another sale, or bring in more assets to generate $20,000 more in gross production/sales, it would bring him up to the $300,000 threshold.  At that level, he’ll earn 38% on the total amount for the year, plus a potential long-term productivity bonus of 2.5%.  That $20,000 sale could mean an increase in yearly compensation of $23,500.  Do you think that broker isn’t calling his customers in the latter half of December looking for something–anything–they might be willing to buy?

You can see a more straightforward conflict of interest in the Walls Fargo Advisors payout grid, where brokers, agents and financial advisors are paid additional bonus percentages if they can sell certain noninvestment products–which are coyly not named directly, but appear to be related to gathering assets the firm will manage (Net Asset Flow Award = 2.5% in additional payout) or getting customers to take out loans (Lending and Banking Award = .5%-1.5% depending on production).  The customer may not need to refinance a home mortgage through Wells Fargo, but if it means an additional payout that raises the broker’s entire compensation structure, hey, why not give it a pitch?

photo credit: jonrawlinson

New research on retiree spending habits may aid financial advisors with retirement income planning.

One study by The Sun Life titled The Expense Reality shows that retirees do follow some spending patterns.  Michael Kitces of Kitces.com’s Nerd’s Eye View blog does a good job of summarizing the study in his blog post: Does extra retirement spending follow a consistent aging sequence? Some of the highlights from his blog include:

“domestic and international travel is higher for retirements in their 50s and 60s and trails off for those in their 70s and 80s…international travel tends to trail off earlier (for retirees in their 70s), while domestic travel spending tends not to drop significantly until the retirees reach their 80s.”

“Hobby expenses are often higher in the early retiree years, as are new/second business start-up expenses, which trail off in later years.”

“a very significant leap in luxury item spending for those in their 70s, almost double the spending in this area for those in their 50s and 60s, before it drops even more significantly for those in their 80s.”

“those in their 80s tend to have the strongest charitable giving activity, followed closely by those in their 60s.” 

From these points is appears that spending shifts as retirees cross off some of the items on their bucket list.

Another study summarized at Bogleheads.org concludes that retirement spending tends to drop around 14% immediately after people quit work, and continues to fall as retirees age into their late 70s. Interestingly enough, only 53% of the households followed this pattern of spending. Another 35% of households spent close to the same amount in retirement as they did in their later working years. Another 12% spent more in retirement.

Figuring out which type of retirees spent the same in retirement and which 12% spent more in retirement could aid financial planners’ retirement planning exponentially. If planners knew someone was going to spend less going into retirement, they could set up a higher withdrawal rate. Conversely, if planners knew which retirees would spend more, they could set up a lower withdrawal rate.

Look for more studies, as this new area of research would impact everything from tax planning to long term care planning, and everything in between.

photo credit: K.Hurley

Many of us struggle to keep up. Often times our finances are the last thing on our minds until there is a problem with them. This article is part of a series of articles written to help you Organize Your Finances. For others, click on the category Organize, or the Organize Your Finances tab at the top.

The start of a new year always seems to bring new hope. As we contemplate the past year, we look forward to what we’d like to accomplish in the New Year. You’d be amazed how many calls I get requesting a free consultation around the New Year. As the year progresses, we lose sight of our initial goals and regress back to our old habits. But there are ways to make sure you don’t go back to the old ways. Here are three steps to change:

1. Write Your Resolutions Down. It is important to take your resolutions from thinking to doing by actually writing them down. Put them on paper, and be as detailed as possible. If you want to lose 10lbs, write your desired weight down, write I am 150lbs. If you want to go to Venice write I am visiting Venice for 14 days in August, etc.

2. Visualize Your Goals Happening. Imagine yourself riding a gondola to an Italian restaurant and sitting down and enjoying a nice bottle of Chianti over a pasta marinara. Taste the sauce and smell the sea in your visualization.

3. Remind Yourself Daily of Your Goal. By constantly reminding yourself, by reading your goal, either first thing in the morning, or before you go to bed, you bring to top-of-mind awareness your goals each day. A friend of mine said that it takes 30 days to establish a habit. I’d suggest reading your goal for at least 30 days to see if you experience a change in your thinking. Of course I recommend reading it every day for the entire year, but baby steps first.

Writing your goals down shows you what you want to do. Visualizing them makes you excited about them. Reminding yourself of your goals daily keeps you thinking about them constantly, which subconsciously makes you think about ways to accomplish your goals. You can choose between buying that flat screen TV on sale, or using your old TV to get you by until you visit Italy. You can do the same thing with your financial goals! Write them down. Tell me about them. Together we can put pen to paper and try to make them happen. Once you’ve written out a plan, imagine that plan happening, and remind yourself of it daily. How do I know these steps work? When I graduated from MSU I had a goal of owning my own business. Today that goal is a reality.

 photo credit: lrargerich

1. If you had all the money in the world, what would you do different than you are doing now?
2. If you were told by a doctor that you had 10 years to live, and that you would die quietly, what would you do different?
3. If you were told this morning by a doctor that you were going to die within 24hrs, what would you regret not having done?

As you can see, these questions help you clarify what is most important in your life. We all live as if we are going to live forever. But as we contemplate mortality, our true purpose in life become easier to see. And if you are at all interested in helping an advisor walk you through this form of planning, I suggest you search their worldwide directory.

Other advisors use different life planning techniques to define what’s most important. One test is to grab a pen and paper and in 30 seconds write down the 5 most important things in your life. The reason you do it fast is so that you don’t have time to think. The 5 things that come to mind first, are usually what is most important.

Other good questions to ask:

• What have you always wanted to do, but have been afraid to attempt?
• What gives you the greatest feeling of self worth?
• If you had 1 wish, what 1 GREAT thing would you DARE to dream?

The purpose is to ask yourself what is most important in life. Create a vision of where you want to be in 5, 10, or even 30 years. Once you have defined that, once you  have that vision clearly in  your mind, you can begin your journey. Professionals such as life planners, financial planners, estate planners, and  others, can help you accomplish those goals.

If you would like to know what other types of life planners are out there, do a simple google search, and you will be amazed at the number of styles.

Below is a neat Year-End Tax Tips video AND 6 Year-End Tax Tips compliments of the IRS.

Six Year-End Tips to Reduce 2011 Taxes

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.
Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn’t paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don’t Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.

For more year-end tax information and to access all IRS forms and publications, visit the IRS website at http://www.irs.gov.

Links:

• Publication 526, Charitable Contributions
• Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011
• Publication 590, Individual Retirement Arrangements (IRAs)
• Publication 550, Investment Income and Expenses
• Retirement Topics, 401(k) and Profit-Sharing Plan Contribution Limits
• Small Business Health Care Tax Credit for Small Employers

photo credit: mbowlersr

My last post discussed next year’s changes in Michigan’s taxes. This time I’d like to discuss changes on how pensions will be taxed starting with your 2012 pension income.

Probably one of the first things you should know is that if your pension income is subject to Michigan tax, you NEED TO WITHHOLD 4.35% starting January 1st, 2012. This includes distributions from pension and retirement benefits such as defined benefit pensions, IRA withdrawals, annuities, profit sharing, stock bonus and other deferred compensation plans.

Your pension may or may not be taxed (and require withholdings) depending on when you were born. The new law separates taxpayers into three groups:

• Taxpayers born before 1946
• Taxpayers born from 1946 to 1952
• Taxpayers born after 1952

photo credit: Balthazira

Yesterday I went to a Pure Michigan tax seminar put on by the Michigan Chapter of the National Association of Tax Preparers. Aside from getting an update on the relatively unaltered 2011 Michigan tax return, I was also given the inside scoop on the changes headed our way in 2012. Because the Michigan Treasury is leaving the general education of the changes up to tax practioners and pension companies, who will also be largely impacted by the changes, I thought I’d post a blog or two on the subject.

What are some of the changes headed our way in 2012? As you probably already know, Gov. Snyder changed the tax landscape in Michigan drastically by eliminating the Michigan Business Tax or MBT. This tax was hindering an already cripple economy by hurting existing business and dissuading new businesses from coming here.

In place of the MBT, revenue will come from increased tax on income. This increase will not come by way of a tax rate increase, but rather by less deductions and credits.

Michigan Taxpayers will no longer be able to deduct:

• Political Contributions
• $600 exemption for children under age 19
• IRA distributions used to pay higher education
• Charitable contributions made from a qualified retirement plan
• Proceeds won from MI bingo, raffle, or charity games
• Net Income from gas and oil royalty interest