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U.S. sets new standard for financial advisors and agents (like me!)

Leave a Comment / January 23, 2021

posted by Michael Goodman

(The article below discusses the new rule being set by the U.S. Labor Department that will require financial advisors to put the needs of the clients first. My first reaction is – why did it take so long to create such a rule? In my practice, I ALWAYS put the needs of clients first and never offer any products or services that are not just suitable for the client, but which satisfy a particular objective.)

Labor Department rule sets new standards for retirement advice

By Jonnelle Marte

(view the original article HERE)

The Labor Department announced sweeping rules Wednesday that could transform the financial advice given to people saving for retirement by requiring brokers and advisers to put their clients’ interests first.

The long-awaited “fiduciary rule” would create a new standard for brokers and advisers that is stricter than current regulations, which only require that brokers recommend products that are “suitable,” even if it may not be the investor’s best option.

At a time when mom-and-pop savers are increasingly being put in charge of their own retirement security, the rule is meant to add a new layer of protection to guard workers from poor or conflicted investment advice. The rule is supposed to improve disclosures and to reduce conflicts of interest, such as cases when a firm is paid by a mutual fund company or other third party for recommending a particular investment.

“This is a huge win for the middle class,” said Thomas Perez, secretary of the Labor Department. “In far too many places and on far too many issues, the rules no longer work for working people.”

Proponents of the rule say it should cut back on cases of retirement savers being steered into complicated and pricey investments, leaving them with more savings in their pockets. While the new rule won’t ban commissions, brokers may have to explain why they are recommending a particular product when a less expensive option is available, and they could face scrutiny if they recommend complicated products. Conflicted investment advice costs savers $17 billion a year, according to an estimate from the White House Council of Economic Advisers.

“Hard workers need every dollar to work for them,” said Sen. Elizabeth Warren during a press event Wednesday announcing the rule.

It’s too soon to know exactly how the rule will play out, but the change could lead savers to invest more of their money in low-cost index-based funds, analysts say. Some investment firms could also lower their fees. For instance, LPL Financial said last month that it would allow savers to hold accounts with smaller balances and that it would cut the fees for some funds by up to 30 percent.

Another potential impact of the new rules, which affect people saving in individual retirement accounts or rolling money over from a 401(k) plan to an IRA, is that retirement savers might end up switching accounts or investment firms. Some investors may have conversations with their brokers and advisers over the next several months about whether they should be moved into a different kind of account or work with a different firm altogether.

“We’re definitely going to see investors that are forced to change how they interact with the investment services industry,” says Michael Wong, an analyst focusing on brokerages and exchanges for the fund research firm Morningstar.

Some firms may decide to move investors from commission-based accounts to fee-based accounts, where an investor’s costs may be structured as a percentage of assets invested, Wong said. The move would put savers into accounts where what brokers and advisers are paid would not depend on the type of investment product they sell, he added.

Those fee-based accounts are already subject to fiduciary standards but some financial professionals have said it may raise costs for investors who rarely make trades and are more likely to hold on to investments for the long term.

For some savers, particularly those with small account balances, the new regulations could require them to take on a bigger role in how their money is managed – particularly if they lose the advisers they’re working with now. Some companies facing higher administrative costs may feel pressure to drop clients with low account balances, say below $50,000, which may no longer be as profitable with fewer commissions. Some firms may try to transfer savers into stripped-down, online-based accounts, where they may pay lower fees but also receive less personalized advice.

Members of the financial industry said Wednesday that they were still reviewing the details of the rule but expressed initial worries about how the regulations would affect their relationships with customers.

“We remain concerned that the [Department of Labor’s] rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement,” said Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, a trade group for broker dealers and other financial professionals.

The shift could also encourage more people to use discount brokerages or online investment accounts dubbed “robo-advisers,” which typically use algorithms to help people create portfolios, according to a Morningstar report. The online options can often be more affordable than working with a financial adviser, in part because they often using index-based investment options.

Judy Barfell, a 67-year-old retiree near Daytona Beach, Fla., was surprised to learn a few years ago that her IRA savings were invested partially in emerging market funds, high yield bonds and other risky investments. After talking to her adviser about the portfolio and doing some other research, she also realized she was paying roughly twice as much in investment fees each year as she thought she was.

“You trust the people that you put your money with and then this happens,” she said.

Last year, Barfell moved her savings into an account with Rebalance IRA, an online based account where her advisory and investment fees add up to about 0.7 percent of her savings, down from the close to 2 percent in fees she was paying before. She said she is glad the rule will require advisers to put investors’ interest first, something she had previously assumed was required.

“You spend a lot of time in your career cutting out the money to save,” Barfell said. “It’s hard when you have your life … to put all that money aside. And then you save it and to have someone take advantage of you is really disheartening.”

The Labor Department also says educational information offered to retirement savers about types of investments would still be allowed under the new rules. But investment firms consulting savers on whether they should keep their money in a 401(k) or roll them over into an IRA would be required to meet the new standard on any advice they offer. Financial firms would have until January 2018 to get into compliance.

Wall Street Math

Leave a Comment / October 21, 2014

 

WALL STREET MATH

By Michael Goodman

On January 1, 1984, the S&P 500 stood at $164.93. Over the next 30 years,
it grew to $1,848.36. The annual returns were: (read down the first column, down the second column, etc)

1984 – 1.4% 1994 – -1.5% 2004 – 9.0%
1985 – 26.3% 1995 – 34.1% 2005 – 3.0%
1986 – 14.6% 1996 – 20.3% 2006 – 13.6%
1987 – 2.0% 1997 – 31.0% 2007 – 3.5%
1988 – 12.4% 1998 – 26.7% 2008 – -38.5%
1989 – 27.3% 1999 – 19.5% 2009 – 23.5%
1990 – -6.6% 2000 – -10.1% 2010 – 12.8%
1991 – 26.3% 2001 – -13.0% 2011 – -0%
1992 – 4.5% 2002 – -23.4% 2012 – 13.4%
1993 – 7.1% 2003 – 26.4% 2013 – 29.6%

If you total these up and divide by 30, you will get an average return of 9.84%
(not including dividends). But did the S&P 500 actually grow at a rate of
9.84%? Using my HP Business calculator to do the time value of money calculation,
I find that when $164.93 grows to $1,848.36 over 30 years, the actual annualized
rate of growth is 8.39%. What’s up?! Why is the actual growth rate 1.5% LESS
than the average rate? The answer is Wall Street Math.

Anytime you average a series of numbers that includes negative numbers, this
problem will arise. Just think about this simplified example. If you invest
$100 and it goes up 10% in the first two years, then goes down 20% in the third
year, what is your rate of growth? The AVERAGE of these three years is zero%
(10, 10, -20 = 0/3= 0%). But did your investment actually break even? NO! Your
$100 goes up 10% to $110 after one year; goes up 10% to $121 after two years;
then goes down 20% to $96.80 after the third year. You lost $3.20 over the three
years, a “growth” rate of -1.07%. When an investment goes down by
ANY amount, it must go up a HIGHER percentage to break even. If a $100 investment
goes down 20%, you now have $80, right? It now needs to go up by 25% just to
break even ($20/$80 = 25%).

The point of this is that it’s not unusual to hear Wall Street guys talk about
the average growth rate of the market over a period of time. BEWARE of averages
used to describe the growth rate of securities when there is a chance of loss.
Those numbers are NOT accurate.

How does this apply to your retirement and IUL’s (indexed universal life policies)?
If you turn all of those red negative numbers above into zeros, then change
the growth numbers that are larger than 14.5% into a 14.5 and average the numbers,
you get the growth rate of an IUL with a cap of 14.5% and a guaranteed floor
of 0%. That growth rate was 8.56% during the same years that the S&P 500
was growing at 8.39%.

Keep in mind that all IUL’s are not the same. Just as your investments in the
market have costs and fees, part of the premium paid for an IUL also goes to
fees and the cost of insurance. Every company charges different amounts for
the cost of insurance and other fees, and many companies have caps that are
less than 14.5%. To get an IUL with the lowest costs from a strong carrier, your agent must work with the right insurance companies and he’s got to know how to design a policy that
maximizes growth of the cash value.

The only way to know how an IUL compares to other financial options is to speak
with a good agent and get a quote/illustration. If you’re in the state of California,
send me a note HERE.

Michael Goodman

Life Insurance Agent in Santa Clarita, CA

 

Don’t fall into these Social Security traps

Leave a Comment / May 12, 2014

(I find that MANY of the clients I work with are not aware that the income from their pensions and “qualified” savings plans (like 401k’s and IRA’s) will make their Social Security income taxable. This is one of the areas where an IUL is especially effective for retirement planning, because the distributions from an IUL are income tax-free and will NOT cause your Social Security income to become taxable.

Michael Goodman)

(this article was originally posted on MSN.com and you can see it HERE)

By Kandice Bridges, BankRate.com

If you’re looking forward to turning age 62 so you can begin collecting Social Security benefits and live on Easy Street, you might get caught off guard. Some of the Social Security rules can be frighteningly complex. Because it will likely represent a large portion of your retirement income, it’s important to understand how the government program works.

For instance, there are limits on how much you can earn while collecting benefits, and if you exceed those limits, your Social Security benefits will get cut substantially. That’s just one of the snares that could trip you up.

Make sure you plan appropriately to avoid these six Social Security traps.

Trap No. 1: Social Security may be taxable

If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. Even income sources that are normally tax-exempt, such as income from municipal bonds, must be factored into the total income equation for the purpose of computing tax on Social Security benefits.

Eric Levenhagen, CPA and Certified Tax Coach with ProWise Tax & Accounting, says to find out whether any of your Social Security benefits are taxable, “Look at your total taxable income plus half of your Social Security benefit. Make sure you add back any tax-exempt interest income.”
When your taxable income, tax-free income and half of your Social Security benefit exceed $25,000 ($32,000 for married couples filing jointly), that’s when you’re in the zone to pay taxes on Social Security income.

Another unexpected income source that could impact taxes on Social Security: proceeds from a Roth conversion. If you’re thinking about doing a Roth conversion, do so before receiving Social Security benefits, says Steve Weisman, an attorney and college professor at Bentley University. “A lot of people considering converting a traditional (individual retirement account) into a Roth IRA should be aware that if they do that, they will end up paying income tax on the conversion, which will also be included for determining whether Social Security benefits are taxable,” he says.

Trap No. 2: Must take required minimum distributions

Required minimum distributions, or RMDs, must generally be made from tax-deferred retirement accounts, including traditional IRAs, after a person reaches age 70 1/2. The distributions are treated as ordinary income and may push a taxpayer above the threshold where Social Security benefits become taxable.

“This is a double-edged sword,” says Weisman. “If you are over 70 1/2, you are required to begin taking distributions from IRAs (except Roth IRAs) and other retirement accounts.”

“Here again, you take half of the Social Security benefits plus all other income to determine whether Social Security benefits are taxable. RMDs will be included and drive that up,” says Levenhagen.

You can’t avoid required minimum distributions, but you can avoid being surprised at tax time.

Trap No. 3: Some workers don’t get Social Security

Most people assume Social Security is available to seniors throughout the U.S., but not every type of work will count toward earning Social Security benefits. Many federal employees, certain railroad workers, and employees of some state and local governments are not covered by Social Security.

“Some of my clients have participated in retirement programs offered by employers that don’t pay into Social Security,” says Charles Millington, president at Millington Financial Advisors LLC in Naperville, Ill. “If your employer does not participate in Social Security, then you should be covered under the retirement program offered by your employer.”

However, certain positions within a state government may be covered by Social Security.
Find out whether your employer participates in Social Security or not and if not, whether your position may be covered by Social Security. Make sure you understand where your retirement benefits will be coming from.

Trap No. 4: Early benefits could be a big mistake

If you opt to take Social Security as soon as you are eligible, you may be doing yourself an injustice.

“If you delay taking benefits until age 70, you will see as much as an 8 percent increase in benefits for each year you delay,” says Steve Gaito, Certified Financial Planner professional and director of My Retirement Education Center. “In addition to receiving a higher benefit, the annual cost-of-living adjustment will be based on the higher number.”

“It’s hard to find that kind of rate of return on regular investments, so it’s good to delay if you can,” says Weisman.

Of course, life expectancy plays a part in the decision of when to begin drawing benefits. “You generally know how healthy you are and what your family medical history is,” says Ryan Leib, vice president of Keystone Wealth Management. “We advise clients to determine whether they think they will live longer than age 77. If so, delaying until age 70 will net you more in benefits than opting to start collecting benefits early.”

If you’re able to live off other funds and delay taking Social Security, you should seriously consider doing so. “Delaying taking Social Security until age 70 could mean the difference between cat food and caviar in retirement,” says Leib.

Trap No. 5: Windfall elimination provision

If you work for multiple employers in your career, including both employers that don’t withhold Social Security taxes from your salary (for example, a government agency) and employers that do, the pension you receive based on the noncovered work may reduce your Social Security benefits.

“Many people are not aware that their actual Social Security benefit may be lower than the amount shown on their statements or online because the windfall elimination provision reduction does not occur until the person applies for their benefits and (the Social Security Administration) finds out they are entitled to a pension,” says Charles Scott, president of Pelleton Capital Management in Scottsdale, Ariz.

Social Security applies a formula to determine the reduction. In 2014, the maximum WEP reduction is $408. There is a limit to the WEP reduction for people with very small pensions.

If you have worked for both noncovered and covered employers, don’t let the windfall elimination provision catch you by surprise.

Trap No. 6: Limits on benefits while working

You are allowed to collect Social Security and earn wages from your employer. However, if your wages exceed $15,480 in 2014, your Social Security benefits will be reduced by $1 for every $2 you earn above that level.

During the year in which you reach full retirement age — which ranges from age 65 to 67, depending on your birth year — you can earn up to $41,400 before $1 of your Social Security benefits will be deducted for every $3 you earn above that threshold. However, the money isn’t lost forever. You will be entitled to a credit, so your benefits will increase beginning the month you reach full retirement age.

At full retirement age, no income restrictions apply. “There is no penalty for additional income earned,” says Gaito.

If you plan on working beyond age 62 and anticipate earning more than $15,480 per year, strongly consider putting off Social Security benefits.

 

To discuss how to convert some of your currently taxable income into tax-free distributions, please Contact Me

Michael Goodman
Life Insurance Agent, Santa Clarita, California