Posts Tagged ‘Investment News’

SEC’s EIA rule may resurface – Investment News

July 27, 2009

The US District Court of Appeals has ruled that the SEC cannot regulate Equity Index Annuities. The SEC may reconsider it’s approach and could justify the regulation of a product that is not a security at some point in the future, but for the foreseeable future, these products will continue to be regulated by the Department of Insurance in each state. Insurance is not federally regulated, it is handled at the state level. Either way, you should know about Equity Indexed Annuities in detail before considering purchasing one.

Annuities are a product sold by insurance companies that offer tax-deferral of any income and gains that are not withdrawn from the contract. Fixed annuities offer guaranteed principal and an interest rate that is either fixed or based on a market index. Variable annuities offer the ability to invest in sub-accounts, similar to mutual funds, that can be in equities, fixed income, cash equivalents, and alternatives such as real estate. Gains and income are not taxed until they are withdrawn from the contract. Both fixed and variable annuities are offered either as deferred or immediate contracts. An immediate annuity offers a regular income stream that is generally a fixed amount for life, a time period, or a combination of both. As an example, the payments are for ten years guaranteed and for life thereafter. In that case, the insurance company agrees to pay the purchaser an amount for ten years whether they are alive or not. If they are alive after ten years, the payments are guaranteed to continue until their death.

Equity Index Annuities(EIAs) are a type of fixed annuity. They are not a security and although they contain the word equity, you should not expect an EIA to offer performance that is similar to the stock market. In exchange for the guaranteed principal of the EIA, you give up a portion of the markets return. Many EIAs base their interest rate on a market index like the S&P 500. If the S&P 500 falls, your annuity value remains the same. If the S&P 500 gains, your interest rate will rise either as a percentage of the gain (for instance 50%) or up to a limit or cap (for instance 6.5%). It is important to understand that the index that the EIA uses to determine the interest rate only uses the principal return, dividends are not included. As a result, these contracts are not an alternative to equities but they can be a valid option for funds that might be in fixed income or bank accounts.

The problem with EIA’s is that they are very complex products. Most have high surrender charges and long surrender periods. The worst EIA’s do not allow withdrawals and must be converted to an income stream (annuitized) when you want your money back. Do not buy an EIA if your agent is unable to fully explain the product to your satisfaction. Do not work with any agent, or company, that advertises that you can get the return of the market without the risk! That will not happen!

This overview is minimal, you should go to the NAIC website and request one of their consumer guides. The National Association of Insurance Commissioners offers insurance guides for Auto, Home, Life, Long-term Care, and Annuities. Their guides are educational and not advertising. You can download some of the guides but the annuity guide must be mailed. To get yours, visit NAIC.
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SEC’s EIA rule may resurface – Investment News“>
The reporter for Investment News, Sara Hansard, asked my opinion of these products and was kind enough to include my comments and my picture in her article. To read the article, just click this paragraph or the link below.

SEC’s EIA rule may resurface – Investment News

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What, exactly, does fiduciary really mean? – Investment News

July 23, 2009

Had a great weekend but didn’t follow up on the fiduciary rule, which I had promised. The following article does a great job in covering this issue. It is a must read, and written by a very knowledgeable expert on the fiduciary rule.

What, exactly, does fiduciary really mean? – Investment News

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FPA, NAPFA, state regulators and other groups urge Congress to impose fiduciary standard on all advi…

July 17, 2009

The new administration and congress are considering sweeping investment regulatory changes that are stronger than we have seen in many years. Many of these changes are needed. The following article from Investment News summarizes the fiduciary versus suitability rules that govern investment advisors and brokers. I will add a post this weekend that breaks down both rules, but until then, enjoy this great article! Paul
FPA, NAPFA, state regulators and other groups urge Congress to impose fiduciary standard on all advi…

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Investor confidence going south in July – Investment News

July 15, 2009

Fear and confidence tend to alternate in the financial markets. This article from Investment News gives an indication of the continuation of fear. If there were a Center of Disease Control in the investment industry, the prognosis would be an epidemic of investiphobia!

Investor confidence going south in July – Investment News

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Fear still here?

June 16, 2009

Radio Show Coming Soon!
Investiphobia Radio

A few days ago, Investment News had the following headline,

Headline on June 15, 2009

Headline on June 15, 2009

Click here for full article.

Barclay Wealth, a division of Barclays Capital based in London recently completed a survey of 2,100 wealthy investors and found that although 88% believe that there are good investment opportunities available, 68% are not investing because “they believe the risks of further price declines is too high”.

This is worth repeating, 68% of “wealthy investors” are too fearful to invest in the markets. This group of investors has more experience investing than the average retail investor and many are very knowledgeable. But, they also have more to lose and most haven’t lived through a market like 2008 and 2009. In some ways, this confirms an April article also in Investment News that had the following headline,

A Lost Generation of Investors

A Lost Generation of Investors

Click here for the full article, A Lost Generation of Investors.

Over the course of my career, I have encountered many people who were not alive during the Great Depression but were still emotionally impacted by it. Having heard about it from their parents, they learned wealth destroying principles like, “Never buy Stock” or “If it’s not guaranteed, don’t buy it”. These investors zealously protected their principal, but unfortunately missed out on the tremendous growth of the stock market. They fell behind those that approached investing rationally.

Stock market investors understand that measuring returns over one year is far too short. Jim Cramer, of Mad Money, said last fall that you should pull your money out of the stock market if you need it within the next five years. He was criticized for saying this because he supposedly caused a panic. In reality, you shouldn’t invest in the market if you need the money within at least five years, preferably more like 10. There have been very few ten year periods in the US Stock Market’s history where the return was negative. There have been no fifteen year periods with a negative return. The shorter the time period, the more likely it is that you could experience a loss. Savvy investors remain invested regardless of market conditions, but they do not invest money that they may need in the short term.

Based on what we see happening today, investors may leave the market permanently and another generation may suffer as a result. The purpose of my book, Investiphobia, is to help prevent this from happening. It was written specifically to address the fears that become Investiphobia, a condition that paralyzes and prevents sound investment decisions. It really isn’t hard to invest successfully, but it is impossible if your fears prevent you from investing.

Investiphobia – Advisors get it too!

May 18, 2009

According to an article in today’s issue of Investment News, it’s not just the investor who suffers from investment fear.  It is often their advisor.  In an article entitled, Financial Advisors Face a Crisis of Confidence, Investment News writer Dan Jamieson addresses the “compassion fatique” that many brokers and advisors are currently experiencing.  Here’s a link to the full article,  The term “compassion fatique” was originally intended to describe medical personnel, including nurses, doctors, and anyone who deals with the terminally ill.  Evidently the trauma of the current market conditions are causing casualties across the world of professional investing.  And, maybe that is to be expected.

But would you have expected 80% of affluent investors to be “disgusted with their adviser because their adviser is spooked”?  The  Investment News article quotes consultant Matt Oechsli, president of the Oechsli Institute Inc. in Greensboro, N.C., who stands by that figure.  For those of you that prefer fractions, that means that four out of five wealthy investors are disgusted with their advisor.  If you wondered what a wake up call looked like, look no further.

It is natural for anyone to be concerned in the current market, but it is an indictment of my profession that so many brokers and advisors are being affected.  Let’s look at other fields.  How about transportation?  If you are on a plane and there’s turbulence or a ship in heavy weather, don’t you expect the captain and crew to be confident and reassuring?  Not just for show, but because they have experience, knowledge, and everything they need to know to make it to their destination.  

And, maybe that is the issue.  Many brokers and advisors may have the academic training but lack the experience to handle the first decade of the 21st century.  Half of the past ten years will probably end up negative.  Tough environment if you started with your first client in 1999 or even more recently.

The second issue is the amount of new products and complicated money management methods that have been introduced over the past 10-20 years.  There are books on the bestseller list that talk about the end of Modern Portfolio Theory, Asset Allocation, etc.  When tried and true portfolio methods, like these, are discarded in favor of hedge funds, derivatives, and other really neat sounding products, it shouldn’t surprise anyone that the professionals who foisted this change on their clients are feeling “fatigue”.  Particularly after the tech bubble bust, the housing crisis, the sub-prime mortgage fiasco, auction rate securities…  Ouch!

As an industry, professionals need to return to basics.  There are many good things to consider, even in the current market, but not when you have lost confidence.  Clients will gradually force the industry back to solid investment management methods.  Until then, for many advisors, the path is going to be rocky!  If you are a do-it-yourselfer, you might want to consider that advice as well.

If you work with an “advisor”, make sure that they really are advisors.  The second half of Investiphobia contains a comprehensive, but easy to read, review of the differences between brokers, advisors, and other professionals in the industry.  In this environment, I highly recommend that you avoid the commission “financial advisor” in favor of a professional that works with you on an ongoing basis with no incentive to “sell” anything.  This isn’t the time for creative new products.  Solid advice, careful and diversified asset allocation, and long-term commitment will see us through this storm.

Focus on living, not investing.  My bet is that you and your portfolio will both benefit!  And, as I say in the book, remember:

Money is not your life.  It is simply the means to the life that you want.