Monthly Archives: April 2013

Retirement Meets Reality

A recent article about retirement in Financial Advisor magazine started some thoughts running through my head.  How do you view yourself in retirement?  Taking long walks on the beach?  Playing with the grandchildren?  Taking those vacations you were too busy to take before?  There’s one part of that mental image that’s probably wrong with most of those dreams.  Unless you’re very lucky, in retirement you’ll be old (or older).  And that means that those long walks on the beach, the games with grandchildren and those long trips may be much harder … or impossible … because of physical problems.

Try taking long walks on the beach with a cane or a walker.  Playing ball with the grandkids will tire you out long before it tires them out.  There’s a reason you find the cruise ships loaded with older passengers, it’s a lot easier for them to travel that way.

There’s no cure for age.  Money won’t make it slow down.  Do yourself a favor and don’t delay the adventures of a lifetime until you’re too old to enjoy them.


The Price of Gold

Gold has dropped precipitously in the last two days.   Many individuals and institutions own gold as part of their portfolio.   Those who owned gold for speculative reasons may have been scared out of their positions or forced to sell because of margin calls.  There were rumors about hedge funds with gold exposure who might have to sell other assets to raise cash.  Markets reacted to this risk of contagion other than gold causing a broad stock sell-off.

If you own gold you should evaluate why you own it.  Here is one mutual fund’s rationale for owning it.

There is a key reason for this investment: Exposure to gold provides a hedge against what the portfolio managers believe are structurally weak developed market fiat currencies ‒ the yen, the U.S. dollar and the euro. These currencies appear even weaker now in the face of several years of aggressive central bank monetary policies.

What is their position in face of gold’s weakness?

Gold’s position in the Fund is used as a hedge against these inflationary policies, not simply as a means of obtaining additional portfolio alpha via price appreciation. As such, the portfolio managers plan to maintain the gold position because the aggressive monetary policies from global central bankers remain in place.

Is the rise of gold over or is this a temporary blip?  It depends on many factors and we’re not sure whether gold will prove to be a hedge against the creation of a massive amount of fiat currency by Central Bankers.  It’s not even certain that inflation rather than deflation is in our future.   In an uncertain world it’s usually wise to give yourself lots of alternatives and stay alert.

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How long should you keep documents?

Do you ever wonder how long you should keep documents before you dispose of them?  Maureen Hook at the Hook Law Center provides some answers.

Here’s what Chase Bank recommends that you keep for the following periods of time:

One year – paycheck stubs, bills, credit card receipts, bank statements including cancelled checks. In some cases, a photocopy of the cancelled check attached to the bank statements has replaced the actual check, and this is perfectly acceptable. If needed for tax purposes, keep what is relevant for 7 years. An attorney, accountant, or financial advisor can make a recommendation for your particular circumstances.

Seven years – copies of monthly investment account statements, income tax returns, and any documents like receipts, cancelled checks, etc. that support income or tax deductions filed on tax returns and 1099 forms.

Hold while active – contracts, stock certificates, property tax records, warranties, disputed bills, pension and retirement plans, and home improvement records. Bills and records that are not needed for tax purposes can be disposed of as soon as you receive confirmation that your payment has been received and credited to your account. Receipts for important purchases like appliances should be kept for as long as you have the item in case you need to file a warranty claim.

Foreverwills, life insurance information, and mortgage data.

Many people are using digital technology as a way of keeping records forever without keeping paper.  Scanners that turn paper statements into electronic files are now available at very reasonable prices.  In addition, the major investment firms will retain electronic records of your statements and confirmations for up to 10 years.


Investors Gripes

Tiburon is a consultant to the financial services industry.  In a recent conference they gave investors an opportunity to air their gripes about the experiences they have had.  Here are a few of their gripes.  Do they sound familiar?

  • Advisors who lack expertise.
  • Advisors who don’t explain what they’re doing.
  • Advisors who never take the time to get to know the client.
  • Advisors who lay out various investment options, but don’t tell the client which is the best.
  • Advisors who sell a high-priced product, then come back years later and tell the same client to switch to another high-priced one.
  • Advisers putting clients into products manufactured by their employers that don’t work out.

Some of these gripes can only be attributed to the advisor such as failing to tell the client the optimal investment option.  However, a lot of these are due to the fact that many advisors work for the large investment firms who view their advisors as the “sales force” and put pressure on them to generate revenue by recommending in-house products or suggesting switches which do not benefit the client but generate commissions for the firm.  For example …

Tomas, a technology specialist who considers himself a relatively savvy investor, described “as pretty awful” the experience he had with his wife’s advisors, whom he inherited when he married in 2008. Five years before, they had sold her family a variable annuity. Then the same advisors decided he and his wife needed to place that variable annuity with another.

“When I asked about the fee structure, they said we’ll have another group of experts coming to get into the nitty gritty,” Tomas said, setting off snickering among [the] financial executives.

Getting advisors who are brand new to the business is also associated with the major firms.  These are the ones who hire people without financial experience, give them a self-study guide and some sales training and turn the people who call in asking for a financial advisor over to the rookie.

So .why don’t these people dump their advisors?  Some do, but …

 “It’s tough,” he said. “The relationship is ingrained over years.” This was confirmed by all investor panel members, who said it is often difficult to go through the process of re-allocating investments with another advisor.

If you have had an unsatisfactory experience with your financial advisor this may be the time to search for one that isn’t new to the business, doesn’t sell high priced or in-house products, cares enough to find out about you and tells you what he would do if it were his money.  Contact us via our website or call 757-638-5490.  While you’re at it, get a copy of our book “Before I Go.”

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The Cost of Getting Older

Maureen E. Hook at the Hook Law Center has a good article on Long Term Care insurance.

There is a definite appeal about long-term care insurance, especially since Medicare does not pay for things like extended stays in nursing homes or assisted living facilities. It only pays for skilled nursing care. Medicare also does not pay for in-home care like personal assistants who assist with dressing or cooking. The downside is that premiums can be extremely high, and everyone may not need that level of care. There are a few lucky ones who escape lengthy long-term illnesses.

Read the whole thing. 

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Car Makers Pitch Power as the Ultimate Luxury

I believe it was J.P. Morgan back in the Gilded Age who once said of yachts that if you have to ask how much they cost, you can’t afford it.  If you have that kind of money, you may be in the market for one of these cars.  Via the Wall Street Journal.

Big luxury brands are hoping to expand an elite market of drivers who are drawn to high-end performance vehicles engineered to racing standards, cars like BMW’s BMW.XE +3.11%M series, Audi’s NSU.XE +0.33%RS models, Cadillac’s V-series and Mercedes-Benz’s AMG line. These extreme performers have upward of 500 horsepower under the hood (more than double what’s in a garden-variety luxury sedan) and can zip from a stop to 60 miles per hour in 4 seconds or less—all while burning gas more wantonly than a big pickup truck.

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Public Pensions vs. Reality

Andy Kessler has an insightful op-ed in today’s Wall Street Journal about public pensions.  Referring to the Chapter 9 bankruptcy filing of Stockton, California, he mentions that a large part of the problem is centered around the actuarial assumptions that most public pension plans like CALPERS (California Public Employees Retirement System) use to predict how much money they will have to pay the pensions that public employee retirees have been promised.

 It turns out that the California Public Employees’ Retirement System, or Calpers, is Stockton’s largest creditor and is owed some $900 million. But in the likelihood that U.S. bankruptcy law trumps California pension law, Calpers might not ever be fully repaid.



So what? Calpers has $255 billion in assets to cover present and future pension obligations for its 1.6 million members. Yes, but . . . in March, Calpers Chief Actuary Alan Milligan published a report suggesting that various state employee and school pension funds are only 62%-68% funded 10 years out and only 79%-86% funded 30 years out. Mr. Milligan then proposed—and Calpers approved—raising state employer contributions to the pension fund by 50% over the next six years to return to full funding. That is money these towns and school systems don’t really have. Even with the fee raise, the goal of being fully funded is wishful thinking.

Pension math is more art than science. Actuaries guess, er, compute how much money is needed today based on life expectancies of retirees as well as the expected investment return on the pension portfolio. Shortfalls, or “underfunded pension liabilities,” need to be made up by employers or, in the case of California, taxpayers.

In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren’t so serious.

And the trouble is not just in California. Public-pension funds in Illinois use an average of 8.18% expected returns. According to the actuarial firm Millman, the 100 top U.S. public companies with defined benefit pension assets of $1.3 trillion have an average expected rate of return of 7.5%. Three of them are over 9%. (Since 2000, these assets have returned 5.6%.)

Kessler argues that instead of 7.5%, the real number is probably more like 3.0%.  If that’s true, it is unlikely that these pension plans will be able to pay future retirees what they are expecting.

What can we take away from this?

For one thing, young (and even middle-aged) people today should be saving as much of their income as possible because when they get ready to retire, even if they work for some government entity, the likelihood that they will get the guaranteed pension that today’s retirees are getting is becoming less with each passing year.  A smart person said that something that can’t go on. won’t.  In the future, as in the past, we are going to have to depend more and more on ourselves.  You may want to get a financial check-up along with your physical check up to make sure that you have a bright future.

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Margaret Thatcher RIP

Margaret Thatcher, Ronald Reagan and Pope John Paul combined at a crucial juncture in world history to make epochal changes in the world.  They did two things that had a monumental impact on history: they brought down the USSR and reignited faith in the free market.

Thatcher in her own words:

The fact was that in this country [England], we had gone very much further toward socialism than most democratic countries in Europe—in the extent of the public sector, with the nationalized industries, and the amount of control, and to some extent in attitudes. We had to turn that back. In other words, the center is always the midway between two points, and the whole of the political debate had gone to the left, so the center had moved to the left and I think we are well on the way to pulling it back toward the center. But one wishes to go further. . . .

All of this is going much, much more towards the restoration of the personal responsibility, the independence, with every man a property owner, with every man a capitalist, getting away from the head of state having such a big sector, such a big voice. And, of course, running our financial affairs soundly so that the task of government is to create the climate in which enterprise can flourish.

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Customer Service

In one respect, running an investment business is like any other business: the issue of growth.  I don’t know how people on the outside would answer that question, but people in the business know that the key is getting referrals.  The question then becomes: how do you get referrals?  The answer may surprise you; it isn’t so much the things you do right, but the way you handle problems when things go wrong.

Here’s a story about a frequent traveler who provides an insight into this important issue.

I travel a lot so I have more than my share of experience with airlines. I love JetBlue. Let me give you a recent example why. A flight I was scheduled to take was delayed five hours. That would put my arrival in the wee hours of the morning on a day I had to make a morning presentation. I called to let them know that would be a problem and asked if I could be rebooked on an earlier flight. The person on the phone (which, by the way, was who I connected with after a brief wait on hold without having to navigate some crazy routing system requiring typing in eight choices) put me on the new flight and checked with the supervisor to make sure she had permission to waive the change fee. The call was quick, I got what I wanted, there was no additional cost, sorry for any inconvenience. Easy peasy lemon squeezy.

Compare that to a call I made to United Airlines the week before. The day prior to my trip, they canceled the last leg of my flight, meaning I was not going to make it all the way home. I had been booked on another flight the afternoon of the following day. No accommodations for while I was there, mind you, just moved to a different flight. When I called the customer service line, I was handled by someone for whom English was not a native language. That’s relevant because she did not understand the questions I was asking her. Most questions were met with an extended silence followed by a repeat of the statement or question she had posed to me before I asked my question. After 10 minutes or so, I asked to be transferred to someone who spoke English as a first language. No luck. I asked to be escalated to a supervisor. A minute or two on hold and I was informed “he doesn’t want to talk to you.” No lie – that’s actually what she said.

We finally got me onto a different flight to get me home on the right day. “You will have to pay the $150 change fee” she informed me. “Even though you had bumped me clear onto another day?” I asked. “Yes, you will have to pay a $150 change fee.” We went round and round on this one for some time before I had to forget about it and get on to a meeting I was already late for. (In the end, they never did charge me the fee to change flights. That makes this call even more frustrating in hindsight.)

That this is the sad state of affairs with most companies and not unique to United is partly our own fault. We consumers tend to let price exert an excessive influence on too many buying decisions, driving many services toward commoditization. Especially now that we have the internet. Once we had Travelocity, we could instantly compare fares and reflexively select the cheapest one that meets our criteria. The airlines are left with little more than cost cutting to remain competitive. Service gets cut because it does not usually get rewarded by us consumers when we book our next flight. It is true of many other industries.

So, what does this have to do with your advisory practice?

It is not that we should simply provide good service and train our people well. We already know that.

It is about drivers of client loyalty and referability. Who are your most loyal clients? It is not the ones for whom you have done consistently good work. It is most likely not even the ones for whom you have made the most money or provided the most comprehensive service. Your most loyal clients are probably the ones for whom you provided a quick, easy and effective resolution when they had a problem with your firm or a firm you represent (like a money management platform or investment or insurance company).

When you provide good service, clients get what they expect. Good service is what they planned on and you delivered. It is contract. It is not remarkable. You did not pleasantly surprise them when you delivered on your promise.

When something goes wrong, the unfortunate truth about things these days is that we anticipate that it is going to take some work to set things right. That the people we speak to will be defensive about the error. That they will try to explain that they did what they should have. That we wanted something they don’t actually offer and it was our misinterpretation. And we assume fixing it will take a few steps and some time. So when the first person we talk to solves the problem quickly and effectively, it exceeds our expectations. We remember it. We talk about it. We are impressed by that more than getting great service the first time around. Strange and maybe unfortunate, but true.

One of the major benefits of dealing with a smaller investment firm where the people you speak with can solve your problem without getting a manager’s permission because they ARE the management.  You will not get the run-around, won’t be asked to “Push 1 for English” or be put on hold for 30 minutes.  Our job is to make out clients a fair rate of return over the long-term.   Our other job is to fix things quickly and as painlessly as possible when things don’t go as planned.

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How to Save More For Retirement Without Really Trying

Jason Zweig addresses the serious issue of retirement in modern America.  Gone is the day of working for a company for 40 years and retiring with a pension.  The path to a comfortable retirement now requires a positive action on the part of workers, including participation on 401(k) plans at their workplace.  But getting that participation is a challenge.

This month, the Employee Benefit Research Institute reported that 68% of workers in its annual Retirement Confidence Survey said they think they need to save at least 10% of their household income to live comfortably in retirement. Yet only 24% report that they have saved at least $100,000, and just 57% say they are saving for retirement.

That’s the answer?  Automatic enrollment.

One way to exploit that inertia for a better outcome is automatic enrollment, in which employers default all new workers into the retirement plan unless the workers refuse to participate, which they are free to do at any time.

We agree.  But there is another factor which enters into the process: making the actual decisions regarding the amount to invest and the investment choices in the plan.  Zweig suggests that employers build plans that include automatic escalation features.  That can be part of the solution, but not the whole solution.  In the meantime investment professionals can help.  Getting expert advice can make the difference between a comfortable retirement and one in which the retiree can’t taken advantage of the free time that retirement provides.  For more information, contact us.

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