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What's Happening at LPP

August 2013


In This Letter:

Bonds and the "Motor City Meltdown"


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Carolyn's Blog:

"The Quest for Simplicity" 


Financial Fitness 5k:




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The year is flying by quickly! I thought it would be good to use this space to catch you up on what is going on at Life Planning Partners - a lot is happening.

For our clients, we have mostly finished the insurance reviews and are deep into the estate planning and projection planning reviews. Tim has been reaching out on investment reviews and has a great article on bonds for you below. In the next couple of months, I will be buried in tax return reviews and year-end tax planning. I am grateful no major legislation is pending this year to cause you upheaval in the tax realm!

Our business plan includes the audacious goal of improving financial planning in the entire country. We "preach" the fee-only fiduciary message any chance we get, and participate in numerous projects to improve the quality of financial planning everywhere. Last year, we did a study with many of our clients on advance directive issues. Instead of focusing on what you want done in the event of advanced illness, we asked "What is the quality of life you find acceptable at the end of life?" I am still formalizing everyone's answer, and will have a "standard" document financial planners can use to help their clients through the same process. In October, I will speak at the Financial Planning Association's national meeting about the work we did in this area. Thank you to all the clients who helped in this project. You will hear more about this eventually. Which brings me to my next point...

The other part of our business plan is to do a wonderful job and growing old with about 100 client families. Studies show that a comprehensive financial planning firm can ideally take care of about 40 to 60 clients per planner. Since our planning is very comprehensive, we estimate that number is probably on the lower end for us to do a good job and have a life doing other things we love. To serve 100 clients, we need three planners and the great work of Krissy. Tim and I are working very hard serving almost 70 clients. Our goal was to hire another planner, and that would be it for "growing the practice." Our first attempt at hiring was thwarted by our junior planner moving on for love this past March. We have been looking for a replacement since that time and have had no success! There are many fun, hard-working, and intelligent people out there, but we have yet to find someone who understands our fee only ensemble model and willing to live in Jacksonville. So what do we do?

  • This is a big step - we have decided to stop taking new clients until we hire a new junior planner. This was a hard decision, as we love what we do and want to help people who are a great fit. We hope hiring a new person doesn't take forever, yet we want to make certain our next hire is as close to perfect as possible.
  • We currently have a wonderful intern from UNF, and will continue to mentor students. It has been a fun experience, and you never know - one of them may eventually turn out to be ideal for our future.
  • I'm finishing up our "experiments" and other projects to improve the profession, but have put any new projects on hold until we get a new "junior" deep in the trench. My love of teaching will be okay on the back burner for a while.

Let me know your thoughts and questions and we are happy to take any recommendations!

Other happenings:

Financial Fitness 5k - We Will Pay Your Way!

Life Planning Partners is sponsoring the Financial Fitness 5k. This benefits "Real Sense," a United Way initiative to improve the financial education and situation for Duval county's most economically challenged citizens, and Family Foundations, which provides financial counselling to those in need. We would love for you to join us - run, walk, or just show up - Life Planning Partners will pay the registration for any client or client family member who wants to sign up for this event. Email or call Krissy and she will get you on the list.

I am taking a real vacation.

I will be out of the country starting August 17 for one week. We will be in St. Lucia, and I promised Trib I will stay unplugged as much as possible. Krissy and Tim know where I'm staying, so if there is an emergency they can't handle, which is unlikely, they will contact me.

Take care, have a great rest of the summer, and thank you for all your support.



Bonds and the "Motor City Meltdown"  

by Tim Utecht, CFA


Headlines about Detroit's bankruptcy have been hard to ignore. Many of our clients have at least some sort of exposure to Detroit, often in the form of a municipal bond. So it seems appropriate to address what the Detroit situation means for all of us.

To start, it's important to recognize that not all municipal bonds are created equal, and that certainly applies to those with "Detroit" in the name. Some are direct obligations of the city, while others were issued by separate enterprises or agencies. Some bonds are secured by liens and dedicated revenues, while others do not have that same backing.        

There are two primary categories of municipals - general obligation bonds (GOs) and revenue bonds, based on how the debt will be repaid. GOs are backed by the "full faith and credit" of the issuer, while revenue bonds are generally backed by a particular project being financed.    

GOs have historically been considered the safer of the two categories, with the assumption that municipalities will do everything possible (i.e. raise taxes as high as necessary) to pay their general obligations. Defaulting would certainly make future borrowing extremely expensive, if not impossible, making it something to avoid at all costs.

Detroit, however, is a rather unique situation. The appointed emergency manager has outlined a plan described as "unconventional and precedent-setting" in its treatment of bondholders.   Specifically, G.O. bondholders would be lumped together with other unsecured creditors, meaning they could end up getting pennies on the dollar for their bonds. Historically GOs have been given priority over other unsecured debt, and prior to this no municipality has ever used bankruptcy to force a cut in principal on general obligations. This will likely be battled out in court.

Fortunately, our clients have no general obligation bonds from Detroit. Our exposure is in "secured" debt that is backed by special dedicated revenues (taxes or fees). The majority is in "essential service" water and sewer bonds, with a few issues tied to the Downtown Development Authority (i.e. revenue bonds). The city's plan, as currently proposed, excludes these bonds from the bankruptcy case, since they are secured by revenues that are not part of the city's general operations. The Detroit Water and Sewerage Department is actually one of the city's healthiest assets, serving a large swath of the state. It is self-sufficient, with adequate revenue to make debt payments. People place a high priority on toilets that flush.

Nearly all of our Detroit bond positions are also insured, meaning an outside insurance company would make principal and interest payments in the event of a default. This adds an important level of protection to bondholders.

Above and beyond these attributes and credit protections, the primary method of reducing the impact of negative events is by keeping positions small (i.e. diversification). The typical exposure to Detroit is well below 2% of total assets for our clients, a target we try to maintain for any entity (i.e. company or municipality). Keeping positions small reduces risk.

Detroit has been a prominent story, but we need to put it in context. The municipal market includes over a million individual bonds representing $3.7 trillion in principal. Yet defaults are extremely infrequent, averaging fewer than five per year over the past five years. That number is elevated with the recent recession, and the longer-term average has been less than two defaults per year. Fact is, the vast majority of bonds are repaid in a timely fashion, and bondholders enjoy the consistent cash flows those bonds provide. It's not as interesting as the stories about Detroit, but it is much better news for investors.