Russell Bailyn

Estate Planning: When do I need a Will?

2009-06-29T22:02:26Z

Often I notice clients focusing heavily on the investment aspect of financial planning without giving adequate consideration to estate planning. It tends to be clients under 35 and those who are unmarried who often don’t think they need estate planning. In many cases they do and should spend the time and small amount of money required to establish a will and do a few other things which I’ll discuss below:

]]> What exactly is a will?

Your will makes provisions for how you want to dispose of your assets after you die. A will can be simple, one-page, and to the point, or it can be joint with a spouse or contractual with multiple parties. The complexity of wills tends to correlate with the size of an estate. When possible, the simpler your will, the easier it will be to distribute assets and avoid excessive probate.

A typical will has preliminary clauses which identify your name, state of permanent residence, and a clause which states this will trumps any prior wills you may have created. It then goes into the disposition of assets, the name of the person who will carry out the wishes of your will and finally the signature of a witness that you are signing these wishes into a legally binding document.

Should I do an online will?

Eh, probably not. It’s better than not having one at all but for a couple hundred bucks its wise to have an attorney draft and execute a will on your behalf.

When should I create a will?

I suggest doing so when you have at least one important asset to protect. This could be a home, a small business, an accumulation of cash or securities, etc. Technically anybody ‘of age’ (18) can create one. In order to create a will you have to be competent enough to understand the nature of your will, the extent of your property, and who your immediate family is.

What if I don’t have a will?

State laws vary regarding intestacy (dying without a will) but generally the state will appoint an administrator to settle and distribute the estate. As mentioned above, a spouse, followed by children, grand-children, etc, will usually inherit the majority of assets. If a person has no identifiable family and nobody comes forward, the state can end up keeping the money. The obvious reason not to die intestate is that the state has no clue what you preferences would have been for giving away your assets. Each family has its own dynamics which standard written guidelines couldn’t possibly anticipate. The state doesn’t make provisions for charity and doesn’t think in a ‘tax-friendly’ manner the way an estate attorney or financial planner might.

Do I need a will, even if I have designated beneficiaries?

I get this question all the time and the truth is that you can often use ‘will substitutes’ to avoid many probate issues. When it comes to real property you can often own it with a title that names the rights of a survivor. This way the property will automatically transfer to a spouse or other family member instead of going through the probate process. When it comes to bank accounts, brokerage accounts, insurance policies, etc, you often must name a person to receive your account balances or policy benefits if/when you pass away. Your beneficiary designation will often trump what is stated in the will if a conflict comes up.

What’s the story with taxes on the estate?

We don’t yet know what the asset base for estate taxes will look like after 2010. This year it’s $3.5M and in 2010 there is currently no estate tax. It quite possibly could revert back to $1M. For anybody who dies in 2009, the first $3.5M of an estate is free from taxes. In 2010, the estate tax will be repealed. At any point Congress can vote to further extend the repeal of the estate tax or pick a new number they are comfortable with.

For any amount of an estate over the exempt amount ($3.5M this year) the tax rate is a whopping 45%. Estate planning attorneys and financial planners will often have tips on how to start transferring assets while alive to reduce the value of an estate and keep it subjected to fewer taxes. Giving to charity would be one honorable way to reduce the size of an estate.

How should life insurance factor into my estate plan?

Life insurance is a convenient tool to handle debts payable at one’s death or for business continuity at the death of a business owner. Life insurance basically dedicates a sum of money to someone or something else when one dies. It is commonly used to provide money for a spouse and children in the event of untimely death but has many creative purposes as well.

From an estate planning perspective, life insurance is used to pay estate taxes and debts left by the decedent, to retire the debt of a decedent, such as an outstanding mortgage. It’s also used to create an income stream or to help a beneficiary accumulate wealth.

Based on the needs of the client, there are many different types of policies which may be applicable. For example, a joint-life policy is good for business owners because the surviving owner, regardless of who it may be, would receive the proceeds of the policy.

Insurance proceeds can be established with various settlement options such as a lump sum or an annuity.

I hope this primer is helpful. You should speak with a financial planner and ask questions about your current estate plan. A little time and effort thinking about these issues can save you and your loved ones a giant headache down the road.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Please consult an attorney for specific estate planning advice

Should you consider taking Social Security early?

2009-06-03T21:49:49Z

My clients frequently ask ‘when is the right time’ to start taking Social Security. The most correct answer which is given by both advisors and the Social Security Administration is that you should turn on this income stream when you reach your Full Retirement Age (FRA). Collecting at your FRA is the first opportunity at which you can collect your full benefits and continue to work if you so desire. If you collect your benefits before your FRA they will be reduced and, depending on your earned income, they could be reduced even further. Even so, some people are buzzing about the idea of taking benefits early. After some careful pondering I’ve concluded that this isn’t necessarily the worst idea for some people in certain situations:

]]> First, as a market bull, I have to point out that both bond and equity prices are historically ‘cheap,’ even after the recent rally we’ve had in the major market indexes. Even if you don’t need to take social security at this point, you may be better off taking those payments and funneling them into a portfolio which matches your risk tolerance. If you started this strategy six months ago with a balanced portfolio of stocks and bonds, you’d be doing fairly well at this point. And if the S&P 500 crosses back above 1,000 this year like many are predicting, well, you do the math.

Next, the reality at this point is that retirement accounts are down in value across the board. Those who take withdrawals from their investment accounts, whether in lump sums or as income, are likely collecting less this year than they have in the past several years. They may need those social security payments—reduced or not—now! This is especially true of those in their late 50’s and early 60’s who recently got laid off. Their chances of landing a hot job with fabulous benefits isn’t exactly a given anymore. It may be smarter to plan around not getting a job and seeing how much you can squeeze out of the government through unemployment benefits, social security, etc. It also can be detrimental to a retirement plan to withdraw large sums of money during market downturns because you end up getting a lesser share of the market rally when/if it returns. This concept of ‘sequence risk’ has proved a real concern during this recession for retirees and has been one of the major marketing pushes for companies which sell annuity products.

The next reason involves a process which many people aren’t aware of. If you end up turning on Social Security and later realize that it would have been more to your benefit to have waited, you can fill out Form 521 (Request for Withdrawal Application) and repay the benefits which you have received. You can then start a new, higher level of monthly benefits based on your new, higher age. Cool, right? I’ve even had some clients get letters from companies which claim they can ‘increase your payments’ regardless of your age. After some research we determined these are people trying to expose Form 521 as a brilliant loophole and charge a fee to help people increase their incomes.

Finally, there’s always that ‘paranoia’ reason of taking the money while you can get it. The government claims that they will continue paying out promised benefits indefinitely, and that those in their 50’s and 60’s have nothing to worry about. I actually do believe the government after watching how much money they have thrown at the banks during this recession—it makes the ‘social security shortfall concern’ look somewhat insignificant. Even so, some might wish to take government handouts when they become available rather than trying to figure out when the most beneficial time may be.

I welcome any comments on these thoughts—it’s the first time I’ve ever considered telling certain clients to take Social Security benefits early.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Teaching Financial Literacy to a Younger Generation

2009-05-19T18:28:13Z

Why don’t we teach personal finance in high school? When I was 17 I learned about double shifts in the supply and demand curve in AP Economics before I was formally taught the difference between a stock and a bond. I learned how to mathematically determine how a business should set its price points based on consumption patterns before I knew how to balance a check book. Do you see where I’m going with this? I truly believe that teaching personal finance to children and teenagers could have positive, long-term effects to both the economy and the general population. Perhaps some of the crippling financial errors people make (such as buying homes they can’t afford) can be avoided in the future with some simple education.

]]> Student loans are one of the issues that inspired this post for me. My clients and readers know that I consider student loans to be one of the most dangerous and misunderstood financial tools out there. High school kids often don’t have parents who fully understand the lending terms of these loans either but tell their kids ‘its an investment in your future.’ Gosh the colleges love to hear that! The desire of kids to attend their ‘dream school’ is a dangerous one if it forces you to borrow your way through life Teenagers should learn about the financial aid process in high school. Chapters 12 and 13 of my book go over some of the many avenues which offer free money to college students through grants and scholarship. Many of these opportunities aren’t well enough publicized and could be through school programming.

If my vision of a financial literacy class ever comes to light, responsible usage of credit cards would undoubtedly be in the curriculum. Money spent on credit cards is real and students often don’t understand that or just don’t care. If going away to college is a student’s first opportunity to act responsibly with credit or pay the consequences, credit cards can teach you an unfortunate lesson. I’ve seen it in my practice with young clients who relied on credit cards to maintain their lifestyle during their last few years in school. Graduating into an economy like this is tough enough; doing it while racking up fees and penalties on a credit card is just not necessary. Credit cards should be used with kids starting at 14 or 15 and they should understand the positive affects of building strong credit at a young age.

The issue of financial literacy affects younger children as well. Most of us have been discussing the financial crisis and the recession with our families and co-workers over the past few months. We leave children out of it because we generally consider it to be ‘over their heads’ or inappropriate to discuss money issues with 4th and 5th graders. That may be true in some cases, but I think keeping a child’s understanding of money to a simple allowance really isn’t going far enough. Just like filling out a scorecard at a baseball game can be a hobby for kids, so can tracking stocks and market indexes—even without the usage of real money. The hypothetical scenarios we deal with in business school about how executives come to make important business decisions can apply to children as well. We just need to create analogies which kids can understand, perhaps using playtime, lunch money, and toys as examples.

It seems to me that we’re entering a proactive era, whether it be making the world a greener place for future generations or raising our moral expectations from publicly traded firms. Why not raise the bar with our kids as well? The world has become increasingly financially complex over the past decade, so much so that many adults haven’t a clue about their overall financial picture. The least we can do is raise our standards to the point where kids graduating into this wild world can keep their heads above water!

Russell Bailyn

--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Tax-Free Munis: Respect the Yield Curve

2009-05-14T19:11:30Z

I had lunch over the weekend with a fellow money manager specializing in municipal bonds. Because of the growing volume of municipal bond business, I like to gather opinions about where the best opportunities are right now in this space. It’s no secret that the current yield spread between treasuries and municipal bonds is totally out of whack. In case you don’t know the historical norms, here is some background: Because municipal bonds purchased by state residents are often free of state and federal taxes, they typically yield less interest to investors than treasury securities with comparable maturities. Lately, treasuries yields have been abysmal in light of the recession. The ‘flight to safety’ play has treasury prices sky high and yields very low. Similarly, the highest rated municipal bonds (AAA) are paying much less interest than municipals bonds in the A and BBB space. I asked my friend if the depressed prices of these highly graded (but not highest graded) muni bonds are accurately reflecting a serious risk of default, or if this could potentially be an opportunity for investors to get paid while the market recovers. I was told that short-medium term treasury prices are ‘unsustainably high’ and quite possibly nothing more than a hiding spot which may disappear if investor’s appetite for risk continues to climb. We also went through a variety of trading strategies which may be profitable if treasury prices continue falling and municipal bond prices (mid-spectrum) continue to rise.

]]> We looked through several historical graphs of treasuries prices and yields, municipal bonds with AAA ratings and with BBB ratings and lower. If you chart out various muni grades from 1998-2008, they chart out similarly, with prices bouncing around within a 10% range of each other. However, starting in late 2008, the BBB grade muni bond prices fall off a cliff, creating a yield spread of over 500 basis points.* Why? The most common answer is a fear of a massive default wave over the next few years similar to that of the Great Depression. What has the actual default rate been so far in the BBB space? Under 1%, or historically average as if the recession barely exists. The explanation for why BBB bonds could jump in price dramatically is as follows: municipalities rarely default on their bonds. When they do, it’s a dead last resort which badly tarnishes the municipality’s future ability to raise cash. Most municipalities, I’m told, would rather fire employees, freeze wages, cut services, basically use every other tool in the box before they turn their back on bondholders. Over the past two weeks many of these BBB bonds have rallied about 15% off their lows.** This has correlated with a jump in the stock market and an overall greater appetite for risk by investors. Many people believe the opportunity offered in the BBB muni bond space is unusually high right now, and the total return could rival that of the S&P 500 during recovery.

That’s not to say ultra-high grade (AAA) municipal bonds aren’t also an interesting space to be in. Prices are down somewhat from the high points (although not much because after treasuries and cash this is considered one of the safer places to hide) and plenty of people still feel the recession has legs. If that is the case, now would be ‘early’ in terms of jumping back into the lower-grade space where the default rate is still uncertain. I may be willing to get my feet wet with BBB bonds but not everybody will do the same.

Along the same lines, shorting the current price of long-term treasury bonds seems to be a popular trade. Barons ran a cover story on this a few months back when treasury prices were even higher and the 10-year T-bond was under 3%. The 10-year is still down in the 3.2% range with some expecting it to rise back to a more ‘normal’ 5% within 24 months. If that were to happen, you’d likely see muni bond prices come up, pushing yields down closer to historical averages.

Question or comments? E-mail me.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

* TheStreet.com: “Take Another Look at High-Yield Munis:” Interview with John Miller of Nuveen: 02/26/2009

** Source: Bloomberg Media: Jan 1st – May 11th 2009

Two of the major independent credit rating services are Moody’s and Standard & Poor’s. They research the financial health of each bond issuer (including issuers of municipal bonds) and assign ratings to the bonds being offered. A bond’s rating helps you assess that bond’s credit quality compared to other bonds. Moody’s and Standard & Poor’s append their ratings with an indicator to show a bond’s ranking within a category. Moody’s uses a numerical indicator. For example, A1 is better than A2 (but still not as good as Aa). Standard & Poor’s use a plus or minus indicator. For example, A+ is better than A, and A is better than A-. Investors typically group bond ratings into two major categories: Investment grade refers to bonds rated Baa/BBB or better. High Yield (also called speculative risk) refers to bonds rated below Baa/BBB. You need to have a high risk tolerance to invest in these bonds.

Government bonds and Treasury bills are guaranteed by the US government and, if held to maturity, they offer a fixed rate of return and fixed principal value.

Municipal bonds offer interest payments exempt from federal taxes and potentially state and local income taxes. Unlike U.S. Treasuries, municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer.

The value of bonds will fluctuate with the changes in interest rates, and if sold prior to maturity may be worth more or less than their original cost.

The S&P 500 Index is an unmanaged index that is generally considered representative of the U.S. Stock market. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is never a guarantee of future results. Investments offering the potential for higher rates of return also involve a higher degree of risk. Actual results will vary.

Custom Retirement Plans Can Build Income

2009-05-01T21:54:34Z

Retirement plans are a mystery to many. It’s no surprise that many small business owners can have a difficult time funding a retirement plan that perfectly fits their needs and does not have them asking, “Is this as good as it gets?” One of the services my firm provides is identifying and implementing customized retirement plan designs for business owners who need something a bit more sophisticated than a one-size-fits-all retirement plan. We tailor to your financial situation after a thorough discovery process. Here’s an example of what a customized retirement plan can accomplish:

]]> Meet Steve. Steve is a 50 year-old owner of a small software development outfit. He has been having a difficult time finding a retirement plan for himself and his two associates, both of whom were earning $105,000 in salary and bonuses annually. Steve was limiting his W-2 wages to $100,000, taking the balance as distributions from his subchapter S corporation. Recently, he had finalized a prolonged divorce that had taken a significant portion of his income over the last few years, dramatically reducing his personal asset base, and, consequently, compromised his retirement readiness.

Steve’s firm was funding a prototype profit sharing plan established a few years back through a household name brokerage firm. Because of the limited contribution formulas available in the prototype plan, he was contributing the same percentage of salary (20%) for himself and his two associates. To receive an annual allocation of $20,000, Steve was forced to provide $42,000 for his employees. He was frustrated that he was giving up more in employee costs than he was saving in taxes and was considering terminating the plan.

Steve's W-2 wages = $100,000 and plan funding = $20,000
Employee 1's W-2 wages = $105,000 and plan funding = $21,000
Employee 2's W-2 wages = $105,000 and plan funding = $21,000

The obvious question was, “Is there a more efficient solution?” One of the plan design experts at our firm was able to point out one step that the client could execute on immediately—reallocating a portion of the S corporation distributions to increase the client’s W-2 wages to the maximum plan compensation of $245,000. Since the client was near the 2009 Social Security wage limit ($106,800) the payroll taxes on the additional wages were largely limited to the combined 2.9% Medicare taxes. By paying an additional $4,200 in payroll taxes, Steve would be able to increase his deduction to the prototype plan to $49,000, thereby realizing net tax savings of about $7,000. While this was a definite improvement, it still left him with a $42,000 plan funding cost for the employees.

Steve's W-2 wages = $245,000 and plan funding = $49,000
Employee 1's W-2 wages = $105,000 and plan funding = $21,000
Employee 2's W-2 wages = $105,000 and plan funding = $21,000

An individually-designed solution would offer a better outcome. And a Cross-Tested 401(k) Profit Sharing Plan was proposed. Since Steve turned 50 in 2009, adding a 401(k) feature allowed him to make a $5,500 catch up contribution in addition to the normal 401(k)/Profit Sharing limit of $49,000 (for a total of $54,500). The allocation to the two younger associates was limited to 5% of their compensation. This reduced their cost
from $42,000 to $10,500.

Steve's W-2 wages = $245,000 and plan funding = $54,500
Employee 1's W-2 wages = $105,000 and plan funding = $5,250
Employee 2's W-2 wages = $105,000 and plan funding = $5,250

Case design specialists inquired whether Steve might be interested in further enhancing his retirement savings by adding a Defined Benefit Plan. Utilizing a defined benefit plan would create a much larger deductible contribution, although it would reduce slightly the allocation to the Cross-Tested 401(k) Profit Sharing Plan. The defined benefit plan allowed Steve to fund $135,000 for his benefits in the defined benefit plan, with a cost of only $4,409 for the two employees. Between the two plans, Steve would be able to fund over $170,000 towards his retirement, with a total cost of less than $15,000 for his associates.

Steve's W-2 wages = $245,000 and plan funding = $171,400
Employee 1's W-2 wages = $105,000 and plan funding = $7,785
Employee 2's W-2 wages = $105,000 and plan funding = $7,124

What does it mean to the client short-term and long-term? With implementation of the plan, the client:

• Reduced his employee funding costs from $42,000 to $15,000
• Improved efficiency of the existing plan by 300%
• Increased his tax-favored savings 800%—from $20,000 to $171,400
• Reduced his taxes (net of employee costs and payroll taxes) by $59,400

In the long term, Steve will most likely be able to restore his asset base and successfully prepare for retirement. The proposed qualified plan strategy will allow him to have access to $175,000 (net after tax) for a period of 25 years, from age 65 to 90, assuming 10 years of contributions and 6.5% growth.

In the coming year, the IRS is requiring that all defined contribution plans be fully restated onto a new document that complies with the changes in pension law contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). You may recall that the most recent requirement of this kind was associated with GUST, when every plan sponsor was required to bring their retirement plans in compliance with the series of laws passed from 1994 to 1997. While the changes brought about by EGTRRA have already been adopted by most plans through good faith amendments, the IRS is now requiring a full restatement of all defined contribution plans so the plan document itself contains the required EGTRRA language.

Because the entire document must be restated to include the new provisions required by EGTRRA, this is an ideal time to consider whether you might benefit from including some optional provisions that could help you reach your business and retirement objectives more efficiently.

Please feel free to call or e-mail me to discuss how we may be able to make your plan more efficient, flexible, and responsive to your business and personal needs.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Clients & Advisors Learn Lessons from Recession

2009-04-28T21:34:09Z

I did an interview over the weekend for a Columbia graduate student seeking both professional and participant commentary about the state of the 401k industry. He wasn’t expecting to hear a whole lot of positive considering the recessionary environment, but he genuinely wanted to know how attitudes and advice regarding 401k investing had changed. He even asked: “had I learned (as an advisor) any lessons from the recent and precipitous market declines?” The answer to that question is a resounding yes and I’d like to share what has changed in my practice and comment on the realities which have surfaced in the planning profession in general as a product of the recession.

]]> One process which has certainly evolved since the onset of the recession is our due diligence when it comes to assessing the risk of various investment products. Periods of intense volatility remind financial advisors of how quickly years of financial gain can be erased. The S&P 500 declined roughly 50% in the 10-month period beginning in May of 2008 and ending in early March, 2009. It took nearly five years for the S&P 500 to climb to those highs from the 2003 lows. In light of this enhanced volatility, many advisors are rethinking what they are getting their clients into when they buy shares of certain stocks, bonds and funds. For example, many advisors rely on rating agencies when it comes to picking bonds for clients. At this point we know that the rating agency business is riddled with questionable behavior, in part due to their compensation structure in which the agencies get paid by the companies which they rate. Rating agencies are also relied upon to convey the financial solvency of insurance companies. Financials advisors review these ratings because they help determine the claims and benefit paying ability of the insurers. If these ratings are inaccurate they can result in bond defaults for clients, lost insurance premiums and overall higher levels of anxiety for everyone.

Along those lines, I’ve spoken with several advisors who feel discouraged by the uncertain nature of the information they rely upon when it comes to making client recommendations. If a prospectus illustrates risk in a way which is understated or inaccurate, there really isn’t much an advisor can do about that. There’s a certain element of trust and responsibility inherent in the financial advisory business because of how many third parties are involved. When counterparties and product providers misrepresent risk, it reflects badly on everybody but ultimately hurts clients the most. One potential method of reducing the risk posed by third parties is managing more assets in-house. The primary disadvantage of doing so is that you become the only person to blame if your performance is lacking. On the flip side, you don’t have to worry about somebody irresponsibly mismanaging your client’s accounts. Lately, at least for me, I prefer to build accounts myself rather than rely on too many outside managers who, quite frankly, I can’t keep a tab on.

As for industry-wide changes, the financial planning profession has been shifting more into ‘planning mode’ from ‘grow your investments’ mode. More specifically, the concept of goal planning around the growth of an investment portfolio has been slowly disappearing. The new highest priority is safety of principal. Investors want to know that their money isn’t going to disappear if they place it with a certain bank or insurance company. Investors are less concerned about rate of return and more concerned about their ability to retain control over their money and have access to it in the future. This pattern is evident in the trillions of dollars either sidelined right now or flowing into government securities which pay little or no interest.

As for this shift towards planning, it seems investors are now looking more closely into whether or not they will be able to reach certain financial goals such as retirement, funding education for children and supporting aging parents. They want to know what, if anything they can do to offset the effects of declining 401k balances and more future uncertainty about the rate of return on investment portfolios. Is working five more years the answer? How will the housing crisis deter plans to sell your home? Is now the time to actually create a monthly budget and stick to it? These are the sorts of concerns clients have been inquiring about with more seriousness than ever before.

We’ve also been focused on creating emergency funds. Most financial planning textbooks recommend keeping 3 months of living expenses on hand in a safe and liquid account. This is really starting to happen now, mostly as a natural reaction to watching other account values fall. It’s also a product of higher savings rates. As home values have fallen, people react by attempting to save a greater percentage of their incomes. Because the stock market is so jittery, banks have become the beneficiaries of greater savings rates.

Recessions can have an interesting effect on people. As a financial advisor it’s my job to make sure my clients don’t react irrationally and impulsively. Helping investors to focus on not just the next six months, but the next ten years can radically change attitudes and behaviors about saving and investing. Perhaps the most helpful thing an advisor can do is keep their clients focused on the planning aspect, even as the markets improve. Building wealth is a daily grind, and the more goal oriented you become, the easier it should be to reach and exceed your expectations.

As always, feel free to e-mail me with any questions.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

The Exodus from Wirehouse to Indepedent

2009-04-20T19:37:59Z

The issue of how to practice is a big one for financial advisors. Regardless of whether you’re starting a business from scratch or moving an existing client book from one firm to the next, the decisions you make will impact your earnings potential and the mood of your office. Is it better to work on a commission basis or collect fees? Will your business grow faster if you join a large brokerage firm or an independent broker/dealer? Should you consider starting your own Registered Investment Advisor (RIA)? A young person entering the financial planning profession will likely be overwhelmed by these choices. All of the recent financial turmoil has only added to the confusion by causing big shifts within the industry. Some of the older and more established firms are disappearing through consolidation and bankruptcy while newer and more current business models are taking over. This hasn’t gone unnoticed by the financial media. Nearly every publication which is specific to the financial planning profession has been doing feature stories on business models for financial advisors. So I figured, why not chime in?

]]> Financial Advisor Magazine is reporting this month that recruiting growth at the largest independent broker/dealer Linsco/Private Ledger (LPL) climbed 160% during the first two months of 2009. The article also notes that the percentage of recruits coming from large wirehouse firms has grown from 30% in 2008 to 42% so far during 2009. Besides the general advantages which other firms might offer in the way of service support and compensation, wirehouse advisors are citing ‘implosion’ at their current firms and more turbulent environments in which conducting business can be very difficult.

While LPL may be smart in their recent positioning to attract new and fleeing reps, they have plenty of competition. Besides independent firms, banks and insurance companies are also hoping to scoop up some of the 2,000+ advisors who switch firms each month.* The reality however is that only the independent channel is truly picking up steam. The explanation for that likely stretches beyond successful marketing and into the actual needs of advisors being filled. Independent firms may offer an advisor much more flexibility than a bank or brokerage firm. The ability to customize one’s business model along with types and levels of support and compensation is extremely appealing to many advisors.

For advisors seeking the maximum payout, they may wish to establish their own RIA and handle statements, trading, marketing, compliance and other support issues themselves. For those willing to share a bit of the bread, picking a broker/dealer firm with the right mix of payout and back-office support may be the better way to go. As many former wirehouse brokers can attest, the transition to independent is anything but easy. Research shows that on average about 30% of an advisor’s book of business never makes it over to a new firm during transition.** Some clients take the advisor’s move as an opportunity to find somebody new at a different firm. Others may like the firm and keep their accounts there but find a new rep. This is why transition support and careful planning are crucial when an advisor decides to make a move. You don’t want to end up losing half your clients in the shuffle.

Overall, I think tracking the exodus of advisors from wirehouse firms can teach us a lot about where the business is headed. At this point the most apparent trend I’m following is the movement into independent b/d’s and RIAs. It seems logical that an advisor would want to control his or her own destiny after years of working for big box corporate firms. The result should be happier advisors who are better prepared to serve the expanding needs and demands of their clients.

Please e-mail me with any questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

*Discovery Database Research: Financial Advisor Magazine (April, 2009)

**Cerulli Associations: Independent Broker-Dealer Magazine (April, 2009)

Cash is King: Ideas for the Ultra-Conservative Investor

2009-04-07T00:14:21Z

Even though the stock market has been showing signs of stability over the past few weeks, the recession is ongoing and plenty of investors may remain paralyzed and shocked over the events of the past six months. Some maintain the attitude that stocks and even bonds are too volatile and sticking with cash investments is the best idea at this point. Others believe the market is headed lower in the short-run so it makes sense financially to keep plenty of cash on hand. Regardless of the reasons, here are some tips for cash-heavy investors who want to stay relatively safe and perhaps earn a little interest on their money.

]]> First, try to keep a maximum of $100,000 with each bank. You may have heard that the FDIC raised its coverage limit to $250,000 back in October in response to bank failures and fears of depression-style bank runs. They did and will continue to keep the coverage at $250,000 until December 31st of this year, at which point it will revert back to $100,000. Only for IRA accounts will the increased coverage be maintained. One way to skirt around this rule if you truly don’t feel like having accounts with multiple banks is by having various registrations. For example, joint accounts are treated differently from individual accounts in the eyes of the FDIC. If you’re married, you could have up to $250,000 (until December 31st) in a joint account and another $250,000 in individual accounts. If you have IRA accounts with your bank (I don’t recommend investing for retirement through a bank but in case you do) those accounts are treated separately and also covered up to $250,000 right now.

Next, I’d be cautious about locking in right now on fixed-rate investments such as CDs and Treasury Bonds. The safety mentality is so dominant at this point that yields are near zero for many common cash investments. If you’re only going to earn a few extra dollars by locking in for five years versus one year, it may be smarter to wait. My feeling is that as better economic data flows in and investors get bored of the low returns offered by CDs, savings accounts and Treasury investments, they may move farther up the risk spectrum into corporate bonds, stocks and other investments with the potential for higher returns. If the recession ends by early 2010, we could see the Fed raise interest rates to combat the potential inflation which will arise as a result of the trillions of new dollars entering our economy from the various stimulus policies. If this happens, fixed-rate investments could start paying out more interest.

If you subscribe to the similarities between the current economy and that of the late 70’s, you may be looking for other defensive plays which typically perform better than cash during inflationary periods. This would include exposure to Gold, Silver, and Oil. Clearly investments correlated to commodities and precious metals will be more volatile than a CD or Treasury Bond, but it may be a smart way to diversify if the value of cash erodes over the next twelve months. An investor might also consider buying TIPS (treasury inflation-protected securities). The yield on TIPS are extremely low right now but the price is indexed to inflation, meaning the securities can appreciate in value if the CPI (consumer price index) moves up.

Questions or Comments? E-mail me.

Russell Bailyn

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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Opportunities in the Bond Market

2009-03-17T21:30:42Z

The recent recession is somewhat unique in that the credit markets have been dragged through the mud with the equity markets. Bondholders, generally considered to be in a safer position than stockholders, aren’t feeling so at ease. Over the past year bonds across the risk spectrum have declined in price amidst speculation that default rates could skyrocket in 2009 and 2010 to levels unseen since the Depression. As a result, investors with a few years on their time horizon may have a real opportunity right now if they pick and choose their investments carefully. Bond prices are down overall and yields are relatively high. The potential payoff could be even greater if the default rates remain contained and the credit spreads start to narrow.

]]> The percentage of expected corporate bond defaults as implied by current credit spreads is currently over 20%.* Meanwhile, several experts have come out in March revising their expected corporate bond default rates below 15%.** Part of that can be explained by improvements in cash flow volatility and consumer sentiment, both of which are factors in computing credit spreads. Even if an investor remains skeptical of unusually high yielding bonds, there may be other bond investments worth looking at further down the risk spectrum.

Depending on the economy, some of the money going into corporate bonds during the second half of 2009 may come from Treasury securities, the current hiding place during this recession. These securities have seen such a strong influx of cash over the past six months that yields are at historic lows. Short-term treasuries are paying near 0, indicating a consumer confidence level so low that investors would rather take nothing if it means guaranteed safety. If the banks continue to stabilize and the economy shows signs of recovery during the second of half of 2009, I think investors will get bored of these pathetically low returns real quickly. When they do, money may come flowing out of treasury securities and into various bond issues and probably equities as well. That makes now (depending on your risk tolerance and investment objectives of course) an interesting time to consider these riskier assets, particularly high-grade corporate bonds.

If you’re a person with a reasonable time frame, say 3-5 years, I think the best approach may be to purchase a basket of investment grade corporate bonds. Investors can attempt to hedge the default risk by having exposure to bonds of varying duration and credit quality. At the heart of my reasoning is a recent increase in optimism coming out of Washington and from the Feds. Bernanke made it clear on 60 minutes this past Sunday that he stands behind the big banks and has the stated goal of not letting them fail. Similar words have been echoed by Obama, Larry Summers and even Bill Gross, the bond king himself.

On a related note, I think there may be an opportunity in the municipal bond space for investors with a few years on their time horizon looking for tax-advantaged investments. On a recent conference call with Dan Loughran, a municipal bond expert, I learned that money has actually been flowing into this asset class over the past four weeks and an increasing number of successful municipal issues have resulted in a confidence boost in the secondary markets. Fund flows have shown most of the new money heading into high quality municipal issues rather than lower rated, higher-yielding issues. The flight to quality mentality still remains for many investors but some are looking for ways to beat inflation.

Questions or comments on bond investing? E-mail me.

Russell Bailyn

--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

*Morningstar Bond Market Report: Bill Mast: March, 2009

**CNN Money: January 29th, 2009. "Corporate Bonds Heat Up."

How does your 401k plan stack up?

2009-03-09T20:58:05Z

Over the past few months I’ve fielded more questions than usual regarding overhauling 401k plans and switching providers outright. The concerns have come from employees and business owners who have found that all or most of the investments in their 401k plan correlate too closely with the major stock and bond indexes. Participants are having a hard time finding ‘hiding spots’ during the turmoil. At a time when most of the major indexes are suffering badly, workers are seeking access to alternative asset classes such as gold and special minerals, energy, fixed accounts and even inverse or ‘bear market’ investments. So what makes a 401k plan good or bad? What can you do to get a better plan in the door at your company?

]]> There are five primary areas in which a 401k plan can either shine or fall short. They are: cost, investments, service, plan design, and fiduciary responsibility. The easiest conversation I have with my 401k clients is regarding cost. Analyzing the expense ratio of investments and related wrap fees, sub-transfer agent fees and 12b1s is always an interesting exercise. A surprising number of investors think they pay little or no money in fees and expenses and ultimately receive 99% or more of their investment returns. What an expensive misunderstanding! According to a recent case study by pension fiduciary Matthew Hutcheson, the average expenses of a 401k plan fall in the neighborhood of 3%, perhaps closer to 4% if you include insurance company 401k platforms which are fairly common.*

As for investments, 401k plan participants usually have a mix of stock and bond investments along with target date or ‘life cycle’ funds. The mix usually varies on the equity side with large-cap, mid-cap, and small-cap, and on the fixed-income side with a few government and corporate bond choices. Sometimes investors will find a commodity or real estate investment, or something else a bit outside the box. What many 401k plan sponsors and participants fail to realize is that a variety of open-architecture plans allow the sponsor to choose from a huge universe of investment options. We’ve customized 401k plans in which participants can create a total portfolio outside of the S&P 500 or Dow if they wish to. As I discuss in a prior blog article, some 401k plans even allow up to 30% of account balances to be invested through self-directed brokerage accounts. This allows investors the ultimate in flexibility, even if debatable how beneficial this option ultimately is for investors.

The service argument speaks for itself. How often does your 401k team come into the office and sit down with you? They should be discussing various 401k allocation options, financial planning issues and the economy. Feedback from my clients has been that most 401k plan vendors dramatically decrease their efforts to service a plan shortly after selling it. It’s a true shame because a simple phone call advising a client to be cautious of continued market turmoil and uncertainty could make a big difference. Some clients don’t even realize when money market or simple cash investments are available to them. I’ve also noticed that 401k plans serviced by independent financial planning firms such as my own tend to offer a much better service option for participants. Rather than calling up an investment company or insurance company to ask a question (which often involves extensive waiting to speak with a poorly trained customer service rep) my clients can call me or any Certified Financial Planner ™ Practitioner at my firm to get answers to their questions and discuss their 401k concerns. While service may be an ‘intangible’ in the short run, it ultimately makes all the difference to have a team of people who you can call and trust to discuss your financial issues.

Plan design issues are often voiced by plan sponsors and more senior executives. Some of these issues would include the rate of participation within the plan, the ability to auto-enroll new employees to the plan, concerns regarding annual compliance testing for the plan, and ascertaining the most effective way to have both highly compensated employees and lower-level employees benefit from the plan equally. These are all issues which are handled better by some TPAs (third-party administrators) than others. In my experience, payroll providers have been a ‘convenient choice’ for administering 401k plans for record-keeping purposes, but ultimately don’t have the best flexibility. After working with a variety of TPAs, I’ve noticed clear differences between each.

Fiduciary responsibility is an area of 401k plan design which has taken on greater importance over the past year or two. Few plan sponsors realize that they can be held liable for plan inefficiencies or errors, especially when those errors have a widespread effect on participants. Some of the ways a company can combat or protect against this liability is through an investment policy statement which outlines the objectives of the investment chosen for the plan and distributes it to participants. This sort of action would tie in to 404c compliance and can come in handy in the event of a confrontational employee. It also helps to review the investment options in the plan annually and document that review. It’s also nice to feel comfortable regarding full ERISA compliance, which a good TPA should help with.

If you have questions or concerns regarding any of the above issues with your 401k plan, feel free to give me a call or send an e-mail. Switching plans is easier than one might think and can save loads of money over the long-run.

Regards,

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
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.

*Uncovering and Understanding Hidden Fees in Qualified Retirement Plans 2nd Edition – Published February 1, 2007: Matthew Hutcheson, Independent Pension Fiduciary

Reflections on the Obama Economy & Stimulus

2009-02-26T16:43:07Z

A recent InvestmentNews survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’m yet to hear any one plan which I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts. Obama believes creating jobs through state-government mandated infrastructure projects will jump start consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan and marginal tax rates will ultimately increase to balance future budgets and service debt. I am somewhat intrigued by the idea of government assistance for past-due mortgage payments and renegotiations of mortgage rates and terms. This concept would at least chip away at the housing problems which are at the heart of the financial crisis. I also think eliminating mark-to-market accounting is crucial along with restoring the uptick rule. A real concerted effort is needed right now to mitigate the economic problems and restore some badly needed consumer confidence.

]]> My concern with Obama’s plan is that the stimulus will be temporary. One scenario could be that we ultimately create three million jobs rather than four million, and the new trend of saving rather than spending will decrease the effect of the stimulus dramatically. Stats show that lower income Americans tend to spend the large majority of their earnings but I think that may be changing in the foreseeable future. The Obama plan may succeed in giving the Dow a temporary bounce, perhaps up to 9,000 or so. It would seem impossible that nearly a trillion dollars of stimulus doesn’t improve our economic stats for a few months. But once the dust settles and we start to ponder paying back the trillions of dollars we spent jump-starting the economy and bailing out the banks, then what happens? We raise taxes on the rich and on small businesses, lose more jobs as a result, and hope that Bernanke and his crew are right about their ability to contain inflation. If not, we get this inflationary deep recession which could easily push the Dow below 7,000.

As for the housing crisis, I firmly believe that 80% of the solution will happen naturally. Any attempt to ‘float’ home prices or spend money to keep people in homes which they can’t afford is absurd. If prices drop another 10% or so, new buyers will likely venture back into the market and scoop up deals. If prices drop back to 2000-2001 levels, the historical chart of national home price appreciation will start making sense again. As for areas with high rates of foreclosure and abandoned homes, I agree with the response given by the Feds lately that allowing regional clumps of foreclosures can be viral and ultimately reduce the property value of broader neighborhoods. We don’t need to be as concerned about foreclosures rates on a national basis: it’s the individual regions which require additional oversight to prevent the scenario of spiraling price declines.

In terms of dealing with the bleeding stock market, I think we have to at least temporarily eliminate mark-to-market accounting. These onerous requirements, designed to improve transparency and fairness for investors, have caused financial stocks to fall apart. In testimony Wednesday, Ben Bernanke first defended mark-to-market by saying it’s logical that investors should have the right to see the actual market value of assets rather than fake ‘book values’ and other bogus valuations designed to dress up balance sheets.
He went on to say that the large number of complex financial instruments we have here in the US along with many illiquid assets make it very difficult to implement a ‘real-time’ valuation. Bernanke said he supports the efforts to further analyze mark-to-market accounting and would like to especially improve the illiquid side of the market.

Similar comments were made with respect to the uptick rule. Bernanke wouldn’t comment too closely on the issue because it’s ultimately the responsibility of the SEC, but he did say they are giving careful consideration to its implications going forward. He certainly left the window open for restoring it. It doesn’t take a genius to realize short-selling by hedge funds and other market-moving investors have exacerbated the downtrend of financial stocks over the past six months.

If we can swiftly address all of the issues above in some kind of organized fashion, I genuinely believe our economy will come out better a couple years down the road. At this point we desperately need some confidence boosting to lift stocks and give ordinary citizens something positive to talk about.

Please e-mail me with any questions or comments here.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Thoughts on Self-Directed Brokerage Options in 401k Accounts

2009-02-20T17:08:29Z

This post is inspired by the endless string of questions I receive each month regarding “in-service” 401k rollovers. As any competent financial advisor or retirement plan sponsor will reply: in-service rollovers before a qualifying event such as reaching retirement age or separating from service are rare and scarcely permitted. The underlying logic is that employers have a fiduciary responsibility and overall moral obligation to their employees when it comes to their retirement plans. Allowing a client to invest their nest-egg in individual stocks and/or other asset classes would present the possibility of that nest egg disappearing quickly. However, because 401k performance has been so dismal over the past six months anyhow, why not give employees the flexibility they so desire? A good solution may lie in a 401k feature which many people don’t talk about: self-directed brokerage accounts commonly referred to as an SDBA feature.

]]> Although long-permitted by ERISA law, SDBAs weren’t particularly popular until the bull market of the 90’s sparked a major interest in stocks. Because so many people invest through 401k plans, this became the logical place to tap funds for speculation. While SDBAs are extremely flexible in terms of investment options, they don’t allow investors to lose more than the total value of their accounts. Options, short-selling and other products and practices which require margin privileges are strictly prohibited by ERISA.

The interesting part to me is how the financial services industry views SDBAs as a win-win-win situation for the brokerage firms, plan participants, and plan fiduciaries. I can certainly understand the benefits to the brokerage firms, but I’d be more cautious as to the benefits to both plan participants and fiduciaries. As we’ll get to below, recent litigation which has heightened the responsibility of plan fiduciaries would probably make SDBAs more of a liability than anything else. That beings said, they may still choose to offer it.

The complaints being waged by those looking for in-service rollovers of their 401k balances is that their employer-sponsored plans are either overly expensive, have limited investment options, or a combination of the two.

An article written by George Chimento on February 20th, 2008 sheds more light on the potential risks to employers offering SDBA and other increasingly flexible 401k arrangements. Chimento writes about the verdict in LaRue v. DeWolff, Boberg & Associates, Inc, et al., one of the more significant ERISA cases of late. The Supreme Court verdict was that if a participant in a self-directed 401k plan gives investment directions, and if a plan fiduciary ignores or botches those directions, the fiduciary should be liable for damages to the participant's account. This may sound like common sense, but the federal courts repeatedly ruled that it would be unreasonable to hold fiduciaries responsible for mistakes made unless they harm an entire plan. In the case of James LaRue, he wasn’t even arguing about losses he sustained in his 401k account as a result of the error--he was arguing for lost profits he suffered due to the error.

The case can serve as an example of the increased liability placed on employers offering self-directed 401k plans (of which there are millions). This case didn’t deal with the specific issue of self-directed brokerage accounts, but one might logically conclude that the more flexibility you offer a participant over their investment decisions, the greater chance of financial losses and blame getting thrown around. It reminds me in some ways of the Social Security debate. While a true laissez-faire capitalist may prefer to self-invest their social security taxes (or eliminate them outright) we must deal with the greater issue of the masses. Investing requires education, discipline, and the ability to act without emotion. Many people--many very smart people--try their hand at investing and ultimately fail in frustration.

So is it beneficial to allow your employees to self-direct a portion of their 401k balances through brokerage accounts? My answer would be yes. It’s not like the majority of paid investment managers are crushing their benchmarks each year. In fact, most of them fall short over long periods of time and simply waste investment dollars in the process. So why not give employees increased access to better products and strategies? For the sake of employers, I might suggest an additional disclaimer document for clients who opt into the self-directed brokerage accounts. It may not hold up in court but it could at least prevent some liability in the short-run.

Please feel free to e-mail me with any questions or comments. If you have a 401k plan at work which you have questions about or feel may not be the best fit for your business, I’d be happy to discuss that as well.

Russell Bailyn

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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Contributing to your IRA for 2008/2009

2009-02-13T21:58:47Z

Some of my clients have baulked at the idea of making a contribution to their traditional or Roth IRA accounts for 2008 before the April 15th deadline. The idea of pumping more money into stock and bond investments in the midst of this ‘economic storm’ is an eerie proposition for some. I’d like to remind anybody still pondering their IRA decisions for 2008 about a few things:

]]> First, we make IRA contributions primarily for the tax benefits. If you’re convinced that the market may still shed some value in the near future, you can always put your contribution into cash or a money market and move it into different asset classes when you feel ready to do so. If you’re within the income limits, making a deductible contribution of $5,000 or $6,000 can greatly cut your tax bill for the year. It could also possibly lower your income enough to qualify you for student loan deductions, a stimulus check, etc. These things are hard to anticipate but can work to your advantage.

If you’re making a Roth IRA contribution, those funds will grow tax-free forever because you’ve already paid income tax on the money you’re contributing. If you consider the possible effects of the massive government spending being considered right now to help the economy, tax brackets seem likely to increase over the long-term. If that turns out to be true, the benefits of Roth IRA investing will only increase.

Second, this isn’t necessarily a bad time to make an IRA contribution just because the markets aren’t doing well overall. Most advisors would view this market downturn as an opportunity to buy shares at lower prices. This will depend on your time frame as the younger you are, the more time you have to wait before cracking your IRA without having to pay the early withdrawal (10%) penalty. Consider your longer-term objectives and try not to act with emotion.

Finally, amidst all of this turmoil, IRA investors at least have the option of self-direction, whereas 401k participants are at the whim of their retirement plans and its investment options. This can often mean higher expenses and more limited choices than one would normally expect. I get countless e-mails each month from readers who want to know if they can perform ‘in-service’ rollovers of their 401k funds into self-directed IRA accounts. While this would be logical considering that employees generally make the bulk of these contributions, in-service withdrawals are generally prohibited. The reason behind this is that some people (not all, but some) would make the silly mistake of investing their life savings in a penny stock or something along those lines which would be risky and irresponsible. Forcing an investor to buy shares through investment companies is, in theory, a protective measure.

As always, feel free to e-mail me with questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Investing in 2009: Have Fundamental Rules Changed?

2009-02-12T18:14:27Z

Twelve months ago, not many people expected 2008 to end in an economic downturn so severe that it would take many of the great 20th century financial institutions with it. Most of us had a basic understanding that a bubble was forming in the housing market, fueled by low interest rates and other pro-growth fiscal and monetary policies. However, the high level of risk within the financial sector was difficult for most investors to detect due to the inherent complexity of securitized assets. Like many things in life which seem too good to be true, people focus on the benefits without giving adequate consideration to the risks. Why rock the boat, right? Well, as the financial bubble continues to burst and scandals like Bernie Madoff's come to light, investors are realizing that due diligence is more important than ever. This applies not only in a broad sense as a wake-up call for Wall Street and its regulators, but in our personal financial lives. 2009 is a good time to re-evaluate investment objectives, investment assumptions, and liquidity needs. In today's column I'd like to consider whether cherished portfolio strategies such as diversification, asset rebalancing, and dollar-cost averaging should remain as fundamental to our investment philosophy as they were a decade ago. I'd also like to review some of the 2009 retirement plan contribution limits. Even if your investment choices become more conservative this year, taking advantage of tax-deferred investment accounts can be important to your longer-term financial success.

]]> Money managers and financial advisors often cheer a diverse portfolio as the best way to defend against market volatility and achieve long-term growth potential. As the theory goes, a well diversified portfolio will be less susceptible to single-sector volatility because when certain sectors move up, others tend to move down. Similar rules apply to a variety of asset classes including international vs. domestic stocks, small-cap vs. large-cap, and growth vs. value. While following these rules has arguably reduced the overall volatility in your portfolio in the past, it hasn't saved you a dime of late. The correlations between various asset classes have seemingly disappeared over the past few months with most assets simply shedding value at this point. One could argue that mass liquidations and de-leveraging within the financial sector are to blame for some of the fire-sale pricing. There's very little an investor can do to diversify away these sorts of risks and others associated with recession. When a lack of consumer confidence pervades markets, we generally see a broad and extended decline in asset prices. Treasuries would be the notable exception in this case. What we can use diversification for is to help protect our investment portfolios against company-specific risks. This might include the labor union issues which tend to flair in the auto sector, and litigation risk which can affect any firm at any time without warning.

Next we explore asset rebalancing, the practice of establishing and maintaining a target asset allocation. If one asset class in our portfolio is outperforming another, we'll move money from the higher performing asset class into others, potentially shifting some profits into weaker performing investments. If we believe markets work in cycles, rebalancing will help us when the tide shifts to benefit the weaker asset classes. The downside to this strategy in the short-run is that larger allocations get made into investments which continue to struggle. If you're automatically moving money into an asset class as it declines, you may be throwing good money after bad without realizing it. Concerned investors need to be exploring the reasons why certain asset classes are declining to determine whether further exposure is potentially profitable, or downright disastrous. Consider the high-yield bond market for a moment. While the stock market has clearly priced in a recession at this point, many high-yield bonds are priced for a depression. The corporate bond spread, which represents the extra yield investors demand to compensate for risk, is near depression era levels. If you believe corporate bond defaults in 2009 could possibly rival the amount seen in the 1930’s, you may be better off shedding this asset class from your portfolio outright. You can always add it back in when the volatility has reduced to normal levels.

Dollar-cost averaging, or the process of depositing money slowly into markets rather than in one lump sum, is arguably as important now as ever before. Because of the wild volatility we've been seeing, where stocks have moved as much as 10% up or down in a single session, investors should remain extra cautious about getting into an investment just prior to a major market move. This is why 401k investing and other automatic investment plans work well for most people. Rather than falling into emotional patterns of buying high and selling low, securities are purchased at random times and prices. Theories vary as to the effectiveness of dollar-cost averaging in the long-run, but many investors seem to like the idea of testing the waters, especially at a time of peaking volatility.*

Overall I'm not convinced the time has come to abandon these fundamental rules of investing. If we assume this recession will pass like the others before it, adapting a new, more conservative approach might only lock in your losses and prevent you from participating in the recovery to come. That being said, this recession revealed an unfortunate interconnectivity between physical real estate and financial markets. The practice of securitization, which was originally pitched as a diversification tool, has allowed even the risk-averse to feel blindsided and taken advantage of. Investors need to pay closer attention to risk exposure inside their portfolios going forward. Speaking to your advisors and evaluating your overall investment strategy and eventual needs for liquidity is a smart idea for early 2009. Consider whether the speculative investments in your portfolio still have the same upside potential as they did in 2006. Rethink the total return potential of owning growth stocks versus dividend-paying consumer staple stocks. People will still be purchasing tissues and toothpaste even when they decide against that second I-pod.
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Contribution Limits for 2009

Regardless of how your risk tolerance may have changed over the past year, qualified retirement plans still offer a way for law firm employees to reduce taxable income and grow savings on a tax-deferred basis. Some firms may offer a 401k plan. If so, the elective deferral limit will jump by $1,000 this year to $16,500. If you're over age 50, you can defer up to an extra $5,500, for a total of $22,000. The same limits would apply to a 403b plan if you work for a non-profit. If you are self-employed or work at a small or mid-sized firm you may have a SEP IRA, Solo 401k, or Profit-Sharing Plan available to you. The contribution limits for these defined contribution plans will rise to $49,000 in 2009, up from $46,000 in 2008. Defined-benefit (pension) plans generally allow much larger contributions but are more complicated to administer. Like the rest of the financial industry, many large retirement plans will see changes in the coming year related to increased transparency for investors. A lot of trust has been lost this year on Wall Street. A genuine effort to better regulate financial firms and keep them honest will go a long way towards rebuilding trust and ultimately, promoting the recovery of our economy.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Dollar cost averaging does not assure a profit or protect against loss in declining markets. This program involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their ability to continue their purchases through periods of low price levels.

The Student Loan Crisis: How Bad Is It?

2009-01-28T21:45:54Z

The student loan industry is a giant scam if you ask me. Parents and students alike don’t realize the slanted arrangement they are about to take on when applying for these loans. Society places such a strong emphasis on education (for good reason) that the education industry and especially the lenders behind it stand to benefit tremendously. It’s a shame that so many of these organizations view a young person’s desire to better educate themselves as an opportunity to rip them off, but I can’t say I’m surprised, not after listening to the news for the past six months. The only way to come out on top and not cost oneself a fortune in interest and penalties over the years is to never miss payments on student loans and, when possible, pay considerably more than the minimums. This can be hard to do at a time when jobs are scarce and higher education is wildly expensive.

]]> At the root of the problem are big banks which have lobbied Congress successfully to remove bankruptcy protection on both federal and private loans. What does that mean? For starters, lenders can charge steep penalties on late and missed payments with the reassurance that they’ll eventually get their money back, even if the borrower files for bankruptcy. The lenders can also be more amenable to deferment and forbearance options for students who can’t make payments immediately upon graduation. This makes the lenders look like good guys who offer extended grace periods but the reality is quite the opposite. Deferring your loans is perhaps the worst thing a borrower can do for their future. All the interest gets tacked on to the back of the loan most likely with added penalties and fees. Deferring a private loan is like paying the minimum on a maxed out credit card: ultimately the lender wins. Hopefully Obama can do something sooner than later about this system which cripples young workers and saddles them with debt.

I’m getting off topic here. My original goal for this article was to discuss the potentially negative effects the credit crisis may have on the student loan industry this year. Even with the one-sided loan agreements which currently exist, lenders will have no choice but to tighten their belts even more during 2009. Regardless of bankruptcy protection and the advantages to the lender of having some students default, there are major costs and headaches involved with excessive default rates. For that reason, lenders will continue to toughen up their borrowing standards and increase interest rates to offset an increase in risk. This effect will probably be most obvious in the less regulated and more risky private loan industry, rather than through federal loans programs such as Stafford and Perkins.

Rumors of private student loan providers asking for ‘government bailouts’ has already caused plenty of chatter. Do we want to support an industry that is poorly regulated and rips off students? Some say yes because at least they afford people the chance to get more education who don’t qualify for federal loans. If they do get help from the government, borrower protection clauses will likely be part of the bargain. Plenty of graduate students, particularly in the legal and medical professions have maxed out their ability to borrow federally subsidized loans. If private loan providers tighten their belts too much, it could dramatically limit access to funds or make them too expensive. It’s an unfortunate situation because many of these students can’t afford to get higher educations without these loans. Even so, lenders have to compensate for increased default risk by charging higher rates of interest. That’s not a great solution in my eyes because it saddles new workers with higher debts and monthly payments, resulting in lower rates of home ownership and, obviously, more stress in general.

On a positive note, federal loan programs have, for the most part, been successful over the last decade. Popular student loan programs such as Stafford, Perkins, and PLUS (Parent Loans for Undergraduate Students) have continued to increase higher education rates and often subsidize interest while students are in school. Even as the cost of borrowing from the government eventually rises, the strength of the programs has been a huge step in the right direction. While credit has dried up in most sectors of the shrinking economy, federally backed student loans actually grew 18.6% year over year in 2008.* The gloomy economy has encouraged a lot of people to go back to school, get more degrees, and hit the job market at a time when the opportunities are a little better.

I had to get all of this off my chest today. I keep reading articles about the effects of the credit crisis on the student loan industry. It just seems like any way you cut it, loans or no loans, high rates or low rates, the student gets the short end of the stick. While the government is busy bailing out the losses created by years of fraud and deception on Wall Street, how about we do something good for the people who will eventually control the economy of tomorrow.

As always, feel free to e-mail me with any questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

* Wall Street Journal: January 9th, 2009