Russell Bailyn -

I’ve gotta say—I was a bit surprised by the opening life of Evan Simonoff’s column in the October Financial Advisor magazine. He said “Who among us (referring to the financial advisor community) really takes this 60% rally in equity prices seriously.” He then goes on to say its “remarkable” how many observers are convinced this rebound is for real. Evan’s column, The Long View, which I read most months, usually provides careful analysis to its arguments. However, this month I was a bit disappointed. Simonoff cites Liz Ann Sonders throughout the article who, it turns out, is actually pretty optimistic about the big market bounce. I didn’t find much if any of the solid data I would expect from an article which looks to support an overall bearish sentiment amongst advisors. Based on what I’ve been hearing at recent financial advisor conferences around New York City, the sentiment is anything but bearish. So let’s take a look at why some advisors might actually take this rally in equity prices seriously.

Good news has outweighed bad news hand over fist since the March lows in the market. It has become increasingly evident that the big market declines from February to March were fueled by panic. Along those lines, I find the case for a W recovery (over a V recovery) minimal at best. The last W recovery was in the 1980’s during the stagflation era. The Fed ran a bonkers monetary policy, raising the Fed Funds rate from 7% to 17% in the late 70’s to halt inflation. It worked, but it caused a recession. The Fed then lowered rates back to down to 9% to stabilize the markets but then raised them back to 19% in 1981, causing the infamous “W” shape. If you chart out the Fed Funds rate against the Dow Jones for that period the parallels become quite clear. Most people view the Fed’s current monetary policy as accommodative whereas back then it was more ‘combative.’ Recent Fed policy decisions indicate deflation is still more of a short-term concern than inflation which I find interesting since so many traders and investors have already jumped all over the inflation plays. I suppose future inflation prospects are hard to ignore given the government’s massive spending agenda.

I look next to the ‘fear spread’ which often builds in the bond market when a double-dip scenario may be looming. But when I look at a broad range of bond market indexes I can’t help but notice dramatically narrower spreads now than we had at the beginning of the year when unprecedented default rates and depression were being priced in. The bond market has essentially priced out the possibility of a double-dip recession. Investors have jumped back into bonds—especially lower grade bonds—at such a rapid clip that many bond indexes stand to outperform the S&P 500 in 2009, an odd victory in a year where equity prices could be up 20%+. As an advisor, I’m hoping for some hint of a rate hike in the near future so bond pricing cracks and I can buy some high quality issues anywhere near par.

On the spending front, we can’t ignore the retail sales numbers which came in earlier this month. September showed a second consecutive month of ex-auto improvement. The weak dollar has done its part by bouncing exports and buoying commodity prices significantly. The housing stats have clearly been improving although one can’t help but point to the housing tax incentive for artificially floating the market. I think the program was a smart idea to help consumers and banks but I think it’s almost time to cut the plug. It all adds up to higher taxes for the wealthy in the future which I believe is an incorrect but nearly given solution at this point.

In terms of unemployment, the pace of job loss has decelerated sharply from those awful numbers earlier this year. With inventories at low levels, rebounding consumer spending, and corporate earnings strong as we’re seeing in the 3rd quarter (especially in the red-hot tech sector,) job growth should be on the horizon. On another note, I’ve heard some pretty out-of-the-box opinions lately regarding unemployment and its potential effects on the economy. Some believe we’re entering an era of naturally higher unemployment (6%+). There are various explanations for this ranging from technological innovation leading to improved efficiency, globalization, business-unfriendly tax policies, etc. The point is that many economists believe not only that the economy can sustain a healthy pace of growth with a slightly smaller but more efficient workforce but also that equity prices can and have traditionally performed just fine immediately following periods of historically high unemployment.
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Now, let’s talk about the elephant in the room: government spending is out of control. We could approach this from various angles ranging from TARP to overly-accommodating tax incentives to ballooning entitlement spending, the new healthcare proposals, etc. The government certainly has the power to screw the improving economy they helped to create. At this point I think it’s a given that marginal tax rates will jump next year at the rate government is growing. Obama couldn’t raise taxes in the middle of the recession—history already taught him why that would have been disastrous. But once economic growth is back on track those individuals and small business owners earning over $250K should gear up for 40% or higher on the federal tax brackets. If you’re a guy like me, living in New York City, my effective tax rate after federal, state, city, social security and Medicare is already somewhere around 50%. Let’s hope those Jimmy Carter brackets aren’t on their way back into style. If you look at the data, the private sector always spends money more efficiently in the long-term. Unemployment generally rises in periods when the governments spending share of GDP rises. Let’s hope Washington is smart enough to avoid these dismal scenarios that market bears love to draw conclusions about.

My bottom line is that we could move higher from here. I believe pre-Lehman equity pricing (S&P 1200) is a fair target and I believe, pending more positive economic data, that we can get back there by the end of Q1, 2010. As always, feel free to e-mail me with any questions or comments.

Russell Bailyn
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Wealth Management
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 02:08 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

When I have new potential clients in my office, I’m always interested to see what their current financial advisor is doing for them. Needless to say, I’m frequently disappointed with the level of service standards (many differing markedly from my own) which some advisors display with multi-million dollar accounts. For example, mutual fund ‘wrap’ programs are very popular with the big brokerage firms. These are basically portfolios of mutual funds wrapped up in advisory platforms with annual fees. As popular as this platform is, I’ve shown clients how to reproduce a similar portfolio which strips out many of the fees and the actively-managed mutual funds. In my opinion, these wrap account platforms are often convenient and provide adequate diversification for many clients, but may not be the most cost effective way to invest. Obviously the money management business is competitive and for me, showing clients a potential method for reducing their costs and creating more efficient portfolios has generated considerable interest.

The first thing I do for my clients is focus on how I can help them achieve their financial objectives. Sounds obvious, right? Believe it or not, many advisors, even if they do so subconsciously, focus too much on the money management and not enough of the planning aspect. And while it would be nice to think that most advisors don’t think of their own bottom line when giving advice, we’ve all got families to feed and reality is reality. A good piece of advice for clients is to inquire heavily into how your advisor get paid, whether it be through hourly fees, asset-based fees, commissions from mutual funds, commissions from insurance products, etc. Understanding an advisor’s compensation structure can be an eye-opening experience. My personal belief is that using a fee-based advisor (hourly and asset-based fees) will often eliminate several important conflicts of interest.

Next, I show clients how to use individual stocks, bonds and exchange-traded funds instead of actively-managed mutual funds.* As I’ve written about in the past, I think mutual funds have their place in the investment world, namely in 401k plans and for small account balances looking for diversification, but I don’t believe they are always right for large brokerage accounts unless the client is buying the funds at net asset value (without paying a front-end or back-end commission) and is buying funds with reasonable expenses (under 1% or 1-1.5% for an international fund).

My clients also receive comprehensive financial planning. Some advisors who I’ve spoken with assume that higher net-worth individuals need less financial planning because they already have sufficient assets to meet their long-term needs. I’ve found this isn’t entirely the case. Plugging all of a client’s assets, liabilities, and annual expenses into software can produce interesting analysis of spending ratios, asset allocation errors and estate planning blips. I’ve also noticed that clients with 2-3M in assets are often concerned about running out of money in their later year and/or not having enough to adequately help their children and grandchildren pay for tuition and other expenses while maintaining their pre-retirement lifestyles. In this case, providing financial planning services can be positive and if the client only wants to focus on money management they will usually say so.

Another planning error which some advisors make with higher net-worth individuals is plugging up too much money in insurance products because they ‘do the work’ for advisors. I tend to keep fixed and variable annuity allocations to around 20% or less of a client’s total investable assets. Annuity products are always good talking points and often an ‘easy sell’ because they provide guarantees during turbulent and volatile environments such as the one we’re currently in. That being said, each client has different needs and figuring them out should always be a priority over product recommendations. Obviously investors and their advisors should have a detailed dialogue about the individual risks, fees, expenses, etc. inherent in each investment product and strategy before deciding on a strategy.

Question or comments? Please e-mail me for further honest discussion.

Russell Bailyn
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Wealth Management
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

Financial planning fees are disclosed via the Form ADV, which you will receive upon engaging in a fee-based management relationship.

Investing in mutual funds involves risk, including possible loss of principal.

Variable annuities are long-term investments designed for retirement. The value of the variable investment options will fluctuate and when redeemed, may be worth more or less than the original cost. Variable annuities are sold by prospectus. For more complete information about underlying fund investment objectives, risk, charges, limitations and expenses, please read the prospectus carefully before investing or sending in money.

Guarantees are subject to the claims-paying ability of the issuing insurance company. CD’s are FDIC insured and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured.

The enhanced income benefit is based upon the claims paying ability of the issuing insurance company and does not apply to the contract value which fluctuates daily. There may be an additional cost for income benefit features of some variable annuities, and depending on the performance of the investment option(s) selected, the contract value at the time of annuitization could be such that the investor would incur a higher expense with the income benefit feature without receiving any explicit benefit.

*Equity-based ETFs are subject to risks similar to those of stocks; fixed income ETFs are subject to risks similar to those of bonds. Investment returns will fluctuate and are subject to market volatility. Shares may be worth more or less than their original cost when sold. Foreign investments have unique and greater risks than domestic investments. Past performance is no guarantee of future results.

Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

Keep in mind that there are many distinctions between mutual funds and variable annuities. For instance, mutual funds serve various short and long-term financial needs, while variable annuities are designed specifically for long-term retirement savings. Unlike mutual funds, variable annuities include insurance features for which you pay certain fees and charges, including mortality and expense charges and a contract administration fee. Mutual funds and variable annuities are taxed in different ways. Mutual funds and variable annuities each have unique features, benefits and charges, and you should discuss the appropriateness of any investment for your particular situation with a qualified investment representative.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 01:54 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

A year ago it was hard for me to keep variable annuity (VA) wholesalers out of my office. The features offered by various insurance companies would change so rapidly that I’d have to take meetings to stay up-to-date.* There was essentially a competition between insurers to load more and greater guarantees onto their products to attract the most new money. But when the stock market started collapsing, the reaction by insurers was very interesting. You see, a large number of annuity contract holders never use the guarantees they pay for. The rider expenses and other fees paid by contract holders which provide them the peace-of-mind they are looking for also keep the insurance companies running profitable businesses. When many contracts became worth dramatically less than the initial premiums, insurers had to hope that there wasn’t a rush to exercise those income benefits, which could have potentially put some insurer’s VA divisions out of business. Not only was each insurer’s ability to ‘hedge’ well enough to pay their riders in question, but their overall balance sheets, in many cases full of bonds and other investments were also cracking at the same time. The snowball effect can lead to ratings cuts which ultimately leads to broken trust and confidence by investors.

A few months ago the government opened up TARP to several insurance companies, giving contract holders a breath of fresh air. At the end of the day, insurance is a game of trust, and if your insurer goes bust you may not get what you paid for.

So how have the surviving VA providers reduced their risk? Primarily by cutting living benefits and/or altering withdrawal rates. According to data from Advanced Sales Corp., in Oakbrook Terrace, Ill, 158 product changes were filed with the SEC since November, 2008. One strategy used by insurance companies is to force investors into certain fixed portfolios controlled by the insurance companies, rather than allowing investor’s to self-direct the investments in their annuity sub-accounts. Raising fees has been a popular method of protection as well. An income rider which cost .95% last year may cost 1.2% this year. While that may not sound like such a big deal, it is. Annuity expenses are usually annual, and .25% shaved off your return over 20 years can cost a bundle.

Finally, withdrawal rates are getting cut. For example, last year many insurance companies were offering 7% annual withdrawals from contracts without penalty. This would allow the owner of a $300,000 contract to pull out $21,000 annually, a nice supplement to income. Those withdrawal rates are starting to drop closer to 5%, or $15,000 on a $300,000 contract. They’re also raising the age in some cases at which clients can withdraw a larger percentage of income, sometimes from 70  75 or 75  80. The bottom line here is more restricted access to contract holders.

So where do we stand on this today? Variable annuities can still be an important part of a retiree’s investment portfolio. The difference today would be that a greater level of due diligence is necessary when determining what percentage of a client’s total assets to put inside insurance contracts. Monitoring costs and showing clients the differences between putting money in a variable annuity vs. a mutual fund portfolio vs. a brokerage account is essential.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

*Guarantees are based on claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns are principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Optional features may involve additional fees. Living benefit riders are available at an additional cost and have restrictions. Limitations may be subject to age, state and a restricted list of fund and asset allocation models.

Investing in mutual funds involves risk, including possible loss of principal.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 02:53 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

When people refer to mutual funds they are most often referring to ‘open-end’ mutual funds in which investors buy and sell shares on a regular basis. Most mutual funds have active managers who, with their teams, make decisions as to the fund holdings which correspond to the fund’s stated objectives. These objectives are often growth, income, international exposure, etc. What many people don’t realize is that similar products exist which may be able to achieve a similar objective but at a lower cost. For example, closed-end funds are out there along with unit investment trusts.* Let me explain each:

Closed-end funds sell a fixed number of shares at one time (generally referred to as the initial public offering) and then trade in a secondary market in which investors can buy the fund intraday similar to a stock. While it trades like a stock, closed-end funds generally own a basket of securities with varying objectives similar to a mutual fund. Closed-end funds have their own set of potential advantages and disadvantages which should be fully explored prior to making a purchase.

Unit investment trusts (UITs) also have initial public offering in which a fixed number of redeemable securities (referred to as units) are issued. However, unlike a mutual fund or closed-end fund, UITs terminate on a stated date in which the investor gets his/her money back, hopefully but not necessarily worth more than what it did on the purchase date. Like a mutual fund, UITs have stated objectives which range from growth and income to specific sector exposure. They are used both as speculative tools and as core holdings. One might choose a UIT if they believe a certain market sector will outperform over the course of one year. At the end of that year, the UIT will convert back to cash, allowing the investor to either change their investment strategy or reinvest the proceeds into the safe or a different UIT.

Perhaps the most noticeable, differentiating characteristic of mutual funds is that each fund is its own trust, in which shares are purchased and redeemed at 4:00 each day. You can’t buy or sell shares in a mutual fund until the close of market. This is convenient in that it may prevent investors from making market timing errors but inconvenient in that you have no liquidity intraday (between 9:30 – 4:00 when the market is open).

It’s good to at least have knowledge of these mutual fund alternatives. In an era where active mutual fund performance is questionable and fees and transparency are all the rage, some find their exposure to mutual funds diminishing quickly. Speak to your broker or advisor to become more educated about these product alternatives.

Russell Bailyn
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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th St. Suite 402
New York, NY 10022
P: 212-752-4343 Ext 231
F: 212-752-7673
rbailyn@premieradvisors.net

*Closed-end funds may trade at a discount or premium to their net asset value. Unit Investment Trusts may be subject to a deferred sales charge is sold before the stated termination date. Closed-end funds are considered specialized funds (non-diversified) and therefore carry additional risks, may trade in the secondary market, may be illiquid and have a long-term time horizon.

Investing in mutual funds involves risk, including possible loss of principal.

Investing in UITs is a long-term strategy with tax consequences so investors should consider their ability to continue investing in successive trusts.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 10:31 AM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

The craze of exchange-traded funds (ETFs) which employ leverage (the use of borrowed capital to increase the potential return of an investment) has been on a tear over the past year.* It makes sense that speculative investors would toy around with such vehicles given the extreme market volatility we’ve been experiencing of late. Combine that with the high level of conviction certain day traders have about which direction the markets will move in and when, and you can fully appreciate why the trading volume on these ETFs is so high. Leveraged ‘inverse’ ETFs are part of this craze as well, allowing investors to take bets against sectors of the market which they expect to decline. Just to be clear, these leveraged ETFs are designed principally for experienced investors who engage in market timing. They wouldn’t generally be suitable for an inexperienced investor or somebody who didn’t fully understand the characteristics, including the risks of the product. The financial advisor channel uses leveraged ETFs as well. In my practice their primary use is as a hedging tool to lock in gains or limit losses on certain positions at certain times. The function which they do not serve, and most advisors will agree on this, is as core portfolio holdings. More on that below:

While leveraged ETFs have been getting better at capturing a high percentage of their targeted daily returns (in terms of NAV) they are most valuable in one-directional markets. If the S&P 500 were to bounce up 10%, down 10%, up 10%, down 10%, etc for a period of months, you’d ultimately lose money holding leveraged ETFs as your core holdings. This would happen to a much lesser extent with ordinary index funds because the long-term erosive quality of leverage wouldn’t apply. It’s the same principal which applies to the stock market when it moves up and down. If the Dow Jones drops from 10,000 to 8,000, that’s a 20% decline. However, for it to rally from 8,000 back to 10,000 is a 25% return. Investors must understand the risks of daily fluctuation when they buy leveraged and inverse leveraged ETFs. I strongly advise reading the prospectus on these funds—it may wildly change your perception of the product once you read the disclaimers on the use of leverage, the consequences of seeking daily leveraged investment results, and the small population of investors/speculators who these products should really appeal to.

Even given that risk, there are some advisors whom I spoke with in April and May who were convinced the market was going to move higher (as it has at the point I’m writing this article). With this scenario of lower volatility and strong market moves in one direction, the leveraged ETF could prove a valuable investor tool. They can be especially useful in IRA accounts which do not typically allow an investor to short the market or employ leverage.

The bottom line on these: useful tools for speculation if you’re educated about the product and know what you’re doing. If you don’t, watch out below as these funds can zap your account value as fast they can build it up.

Russell Bailyn
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Wealth Manager
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

*Equity-based ETFs are subject to risks similar to those of stocks; fixed income ETFs are subject to risks similar to those of bonds. Investment returns will fluctuate and are subject to market volatility. Shares may be worth more or less than their original cost when sold. Foreign investments have unique and greater risks than domestic investments. Past performance is no guarantee of future results.

Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 12:29 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

Welcome to one of the most misunderstood financial products out there. It’s no surprise how little most investors know about variable annuities because they’re extremely complicated and their explanations often come from insurance brokers and financial advisors who often don’t adequately explain their potential benefits and drawbacks. Over the past year variable annuity (VA) sales have skyrocketed as investors seek guarantees which may help them keep retirement plans on track.* So, who exactly is this product right for?

The average variable annuity owner in my practice is in their 50’s or 60’s and uses the annuity as a supplemental tool to provide retirement income. For example, if a couple has a $40K pension and $30K in social security income, we may dedicate a lump sum to an annuity which can provide the additional $30K to give them a total of $100K per year in guaranteed income.

We use the variable annuity in some cases instead of a fixed annuity because of the potential associated with allowing the annuity sub-accounts to fluctuate in stock and bond investments. This way, if the account grows in value, the client’s income base may have the ability to ‘step-up’ to a higher level. And if the contract doesn’t grow, there is still a guaranteed minimum base payout which they can rely upon.

It should be crystal clear that any investor considering the purchase of a variable annuity contract should have a full understanding that annuity options, including death benefits and living benefits, come at additional expenses and are the features are often subject to restrictions and limitations. The only way to fully understand a specific annuity product is to read the prospectus. That may take you a year, but then you’d have better information about how the product truly works.*

An annuity is generally not right for somebody without much savings who may have a need for liquidity. As annuities are designed to be long-term savings and distribution vehicles, they often have surrender periods in which the contract holder would pay a penalty if they were to cash out their contract in full. These periods are often 5 or 7 years.

Annuities also aren’t so popular with do-it-yourself investors. These people might argue that you can create a similar outcome with a basic life insurance policy and an income-oriented brokerage account. Doing it this way could also be less expensive over a long period of time.

The truth, in my opinion, is that annuity products are right for some and not right for others. Those who bought variable annuities with certain living benefits prior to the recession may be feeling good about their purchase at this point (assuming the insurance company is still in business). However, critics will constantly point to the fee exposure over the long-term and rarely find a use for this product in their financial lives.

Questions or comments? E-mail me.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net
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Guarantees are based on claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns are principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Optional features may involve additional fees, expenses, limitations and other restrictions.

Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, is available from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The guaranteed death benefit is based upon the claims paying ability of the issuing insurance company and does not apply to the contract value, which fluctuates daily. There may be an additional cost for the death benefit features of some variable annuities, and depending on the performance of the investment option(s) selected; the contract value at the time of annuitization could be such that the investor would incur a higher expense with the death benefit feature without receiving any explicit benefit.

Withdrawals and other distributions of taxable amounts, including death benefit options, will be subject to ordinary income tax, and if taken prior to age 59 ½ a 10% federal tax penalty may apply.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 12:18 PM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )