|
|
| PARAGON Perspectives:
3rd Quarter 2010 |
| Greetings!
We hope all of you are having a terrific summer! Is it hot enough for you? This quarter Jon Castle tells about the Financial Reform Bill that's working its way through Congress and what it all means. Michelle Ash tackles the topic of Long Term Care and the importance of making a plan. Mike Carignan tells us about the joy of crossing two things off of his "bucket list" and why he did it. Last but not least, we have a tip to share about your auto insurance.
Enjoy what's left of summer and stay cool!
|
The Financial Reform Bill: What does it mean?
by Jon Castle, CFP, ChFC
The financial reform bill that is working its way through Congress has the potential to make a lasting impact upon the financial services - and investment - industry as we know it. Virtually everyone is aware that the bill addresses a number of issues that have been highly publicized, such as bank reserve requirements, lending practices, and transparency issues. Many are not aware that the Financial reform compromise bill also gives the SEC the power to bring Broker Dealers under the Investment Adviser standard. Now - what the heck does that mean?
Current Standards: Suitable versus Fiduciary
Currently there are two standards within the industry - the "suitable" standard, and the fiduciary" standard. Initially, this can seem confusing, but if you take a couple of minutes to think about it, the potential impact of this type of reform - and its impact on your finances - becomes apparent.
What "Suitable" Means
Currently, Broker Dealers (institutions that manufacture and/or sell securities for commissions) are held to the "suitable" standard. In other words, they have to recommend and sell (usually for a commission) something that would "suit" you in your financial situation. It can be their own product, a product from another firm, or
a security that, based on other people in your situation - would generally seem appropriate. There is no requirement to put the client FIRST - in fact - as long as the recommendation is suitable - representatives of Broker Dealers are generally expected to represent the firm and put the firm first, not the client.
What "Fiduciary" Means
In contrast, Investment Advisers are held to a "fiduciary" standard by a different law - the Investment Advisers Act of 1940. This law requires that the firm - and the adviser - must always put the client first. The Investment Adviser must always seek the best possible
recommendation based upon the adviser's training, the facts of the case, and the client's financial information that has been disclosed. Doctors, attorneys who represent clients, pharmacists, and many other professionals are often held to a fiduciary standard by regulation or a code of ethics they are sworn to uphold. Under the Investment Advisers Act - anyone giving investment "advice for compensation" has to act as a fiduciary.
Broker Dealer Workaround
For a long time, Broker Dealers got around this rule by getting the SEC to issue a loophole that became known as the "Merrill Lynch Rule" - The Broker Dealer Exemption rule (SEC Rule 34-5980 of 1999). Broker Dealers lobbied - and won - the ability to give investment advice, but not have to act as a fiduciary. In other
words, as long as they were advising incident to sale of a security, then they could advise that a client buy as long as the security was suitable. So, whatever stock or mutual fund was on the hot list that week, or had a bonus commission tied to it for the rep, could be "advised" or "recommended" to a client without the need for it to be the best recommendation for the client, provided that this advice was tied to the broker trying to make a sale. In other words - Wall Street Brokers had found yet another way to exploit the system - to pretend to be investment advisers giving impartial advice - yet really just selling products and generating more revenue for their firm.
But it gets worse! Recent Senate hearings discovered, and made public, some disturbing practices among many of the major Wall Street firms. For example, it has been common practice for a Broker Dealer to recommend the purchase of a security - a "hot list stock," if you will - to a client - while taking a bearish position on that same stock and trying to unload it from their own accounts. Another common practice included taking short positions in the markets against investments that they had recommended to clients - sometimes referred to as "dump it on the chump," similar to the old "pump and dump" strategy. Clearly, these actions were conflicts of interest - and perhaps were disclosed in the fine print somewhere on the firm's website, but my guess is that the clients receiving the advice - and even perhaps the registered representatives giving the advice - were unaware that they were intentionally being set up to take losses.
Reform Bill Changes
The latest financial reform compromise bill supposedly will fix this. Included in the bill is language that enables the SEC to write a regulation requiring Broker Dealers to act in the best interests of their clients and to reveal any conflicts of interest when providing investment advice to retail clients. If passed, the law will also give the SEC the authority to impose the same fiduciary standard that applies to investment advisers - the standards that PARAGON, for example - adhere to. Honestly, I'll believe it when I see it. The current wording of the Bill requires the SEC to conduct a six month study to determine the impact of making such a ruling. As you might expect - there is a powerful lobby against the requirement - as it would cause Broker Dealers to either change the fundamental way in which they do business (ie - manufacturing securities, buying them for their own account, and then trying to sell them for a profit) or to split their business into two separate parts - an Broker Dealer side, and an investment advisory side. The primary motivating drive of the big Wall Street firms is and always has been, first and foremost, to make a profit - to create securities, take companies public, manufacture investment opportunities, and provide capital to a system that requires return-hungry investors to take higher risks for the possibility of a high returns. In many instances, a fiduciary responsibility to each and every client is diametrically opposed to the fundamental underpinnings of Wall Street. It will be interesting to watch. In the meantime, PARAGON will continue to act as a fiduciary - helping our clients navigate the shark-infested waters of the investment world in which we all have to swim to get ahead.
This newsletter is intended for informational purposes only. Information contained herein is obtained from sources deemed reliable but not guaranteed. No specific tax or legal advice is given nor intended. ALL investing involves the potential of loss - including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. Past performance is not a guarantee of future performance. This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security. |
|
Have You Designed your Long Term Care PLAN Yet?
by Michelle Ash, CFP, CDFA
 More and more frequently these days, clients are asking questions about, and expressing interest in discussing, long term care issues. Now, please don't tune this article out just because the subject is long term care. Notice that nowhere in the title, or thus far, have I mentioned insurance.
Have a plan, not necessarily insurance Having a long term care plan can be very different than having long term care insurance. In fact, the plan might not involve insurance at all. Regardless of how you plan to address the issue if it becomes a reality, we do suggest that you give some thought to it, and have a personalized plan.
Statistics Let's first put the issue in perspective. It may be helpful to start by defining long term care. Long term care is defined as needing assistance with at least two "activities of daily living (ADL's). ADL's include, but are not limited to, eating, bathing, dressing, toileting, and moving from place to place. Long term care needs affect approximately 70% of Americans over the age of 65 today1. The average duration of long term care needs is three years2. The average annual cost for assistance in meeting long term care needs nationally is $68,000 for a semi-private nursing home room, and $18,000 per year for home health care three times per week3. Long term care assistance can be provided in many settings: at home, an adult daycare facility, an assisted living facility, or a nursing home. If dealing with long term care issues becomes a reality for you or your spouse, or both of you, it can potentially be quite expensive.
Plan Components In order to create a long term care plan for your family, consider taking the following steps: 1. First and foremost, imagine that you, or your spouse, were to need long term care assistance. If you were to need it, how would you like it to be provided? What type of living situation would you want to be in? Who would you want to provide the care? Whether or not each of us NEEDS long term care assistance is, unfortunately, not really up to us. Like the development of many other health issues, control over developing disability, dementia, Alzheimer's, and physical decline with age, all of which may necessitate long term care assistance, is likely not in our hands. The only thing we can control, then, is how we choose to deal with the situation. Like most of the other major life issues you plan for, dealing with long term care needs is a problem best solved by planning ahead.
2. Your thoughts regarding step one will help determine the next step: determine how you'll make your vision happen if the issue arises. Generally, the solution falls into one or more of four choices: A. Pay for it yourself B. Ask family or friends to pay for it (or provide the care) C. Go broke and go on Medicaid benefits4 D. Purchase long term care insurance The solution you choose will likely depend on several factors, including your assets, income, family support system and vision of care.
3. After thinking through how you want to be cared for, and how you'd like to address the issue, put your plan into action. If you intent to pay for care costs yourself, you may want to set aside a certain amount of funds that are earmarked for long term care needs to be certain the dollars are there when you need them. If you will rely on family or friends to pay for or provide the care, we highly recommend you talk to them BEFORE the situation becomes a reality. Being a caregiver can be life-changing for the provider. It may require the caregiver to make changes to employment, living arrangements, lifestyle, and even location. If you will rely on public benefits from Medicaid, it may be important to understand the assets and income that may be retained to support a spouse. Spend-down of most of your assets may be a reality in order to go on Medicaid, which may leave a healthy spouse in a significantly altered financial position4.
Finally, you may want to consider purchasing long term care insurance. If you do, be sure to get quotations, and be aware that long term care insurance can be designed a lot like car insurance. Policy design and choice of the deductible ("elimination period"), daily benefit, years of coverage, lifetime benefits amount, and inflation protection are all features that you can choose. The most common concern we hear about long term care insurance is that it's expensive. I would argue that the cost of long term care insurance is largely up to you. Perhaps you want a Ford Focus type of policy; perhaps you want a Lexus. One very important thing to understand: long term care insurance is designed to keep you in your home longer. Insurance companies know that cost of care is cheaper, and insureds are happier, if they can remain at home. It is also important to note that many states, including Florida, have a Partnership Program, whereby in the event you exhaust your long term care policy and go onto Medicaid benefits, you will be allowed to keep an amount of assets equal to the lifetime benefit of the long term care policy that you had purchased.
We're here to help Ultimately you may find that it is difficult to isolate long term care planning from your planning in other areas such as retirement, legacy, cash flow and taxes. For this reason, we welcome and encourage you to talk with us to help incorporate long term care planning into your overall financial plan. And if you should desire to look at long term care insurance, we can assist you with that too.
1. U.S. Department of Health and Human Services, Administration on Aging, Understanding Long Term Care Basics. Click here for link.
2. U.S. Department of Health and Human Services, Administration on Aging, Understanding Long Term Care Basics.
3. U.S. Department of Health and Human Services, Administration on Aging, Understanding Long Term Care Costs.
4. In Florida in 2009, a nursing home patient receiving Medicaid is not allowed to have more than $5,000 of countable assets. A community spouse may retain up to $109,560 in assets plus exempt, non-available and income-producing assets. Florida Agency for Health Care Administration, Click here for link. |
Why?
by Mike Carignan, CFP, CRPC
 I have accomplished two of my major "bucket list" items over the past year and I've had a few people ask me about how and why did I decided to do them at the same time. To give a little perspective, I come from a military background. After attending the Citadel, I went on to spend another 4+ years in the Army, both in the U.S. and on multiple deployments to Southwest Asia. While I was at the Citadel, and in the Army, I exercised regularly and ran 10K's and some other endurance races, but never a triathlon. After getting out of the Army, I went to work as a civilian, and my fitness routine began to slack off a bit. Over the following six years I got into the all too common daily routine that didn't include exercise.
About a year ago I had a friend challenge me to do a triathlon with him in March of this year. My reaction was predictable: I immediately came up with all of the "legitimate" reasons I couldn't do it. I am in the middle of preparing for the CFP exam, I don't have time, I'm too out of shape, I have this bad knee from the Army...blah...blah...blah. His response was very simple. "Do you WANT to do it?" I honestly said yes.
He and I have always pushed each other to do things a little out of our comfort zones, so I wasn't surprised when he followed it up with a challenge. The guy with the best time pays all of the entry fees.
That's how, last September, I decided to take on two of the biggest challenges since leaving the military. I was determined to pass the CFP exam in March and finish my first triathlon three weeks later. How did it turn out and what did I learn? First, I passed the CFP exam, but unfortunately I had to wait two months to find out. After a few hours in the ocean, on the bike, and running, I finished the Nautica South Beach triathlon.
Why?
Working with clients from all different backgrounds and interests, I've learned one very important thing. It doesn't matter what is on your "bucket list" so long as you are out there accomplishing those life goals. Whether it's shaving another 5 strokes off your golf game, selling your first painting, writing the book that's been in your head for years, or finishing your first triathlon, it's just about deciding and then making it happen.
I could quote some psychologists or books about how important it is to stay active in retirement. There are plenty of scientific studies to prove it, but for me, I see the evidence every day meeting with clients that prove the studies. The happiest and most fulfilled individuals we meet are the ones that are still checking off those life to-do's.
Since all of this started with a challenge from a friend, here's my challenge for you: pick one of those things you've always wanted to do, big or small, and let me know when you're going to do it. I look forward to hearing from you! You can call me, or email me at mike.carignan@wealthguards.com. |
 Auto Insurance Premium Savings Tip
Typically, auto insurance companies sign up policy holders using the Blue Book market value of their cars. Once signed, the insurance company has the original value of the vehicle on its books and generates premiums based on that value.
But, if you are in an accident and total your car, you will only receive the current book value on your vehicle.
What the insurance companies don't want you to know is you can call them every year and adjust the value to the current Blue Book value so that your premiums are more in line with insurance coverage if the car is totaled.
The potential cost savings to you? About 20 percent!
For example, if you bought and insured a Chevy truck for $30,000 in 2000, you may still be paying premiums on a $30,000 truck. But that truck has since depreciated to, say, $7,000, you should only be paying on the $7,000. Why? Because if you are in an accident, the insurance company will only reimburse you up to $7,000, not the original $30,000!
Kimberly May, WnR, Inc., The Colony, TX.
|
|
PARAGON is still accepting clients who care deeply about their financial futures and desire comprehensive Wealth Management or Retirement, Income, or Estate Planning.
Please feel free to introduce us to those who might be a match!
| |
|
|
|
