New York Financial Planner - NYC Financial Advisor

Organize Your Financial Life Using MoneyCapsules

2010-03-11T20:41:27Z

In the financial planning profession, many advisors focus on investment management. The focus is often so strongly on managing investments that all the other components of financial planning which people want and need are ignored. In today’s post I’d like to discuss MoneyCapsules, a process-oriented strategy devised by an advisor in my office which focuses on careful management of one’s entire financial life. It’s a service many people want but don’t explain clearly enough to their financial advisor to get it right. I’ve seen it first hand: once people get a handle on their full financial picture, anxiety levels decrease and decision making becomes much easier.

]]> MoneyCapsules is a service which integrates all of your financial resources into one consolidated picture and identifies areas of strength and weakness. MoneyCapsules is not about helping you select a hot stock, time the market or speculate. It’s about providing a simple framework to help you organize and understand your finances: pre-requisites for making better money decisions.

The MoneyCapsules framework may co-exist with your current financial advisor, family office and brokerage relationships. In fact, it is a useful analytical tool for investors with multiple institutional and advisor relationships. Here’s how it works: First we organize all of your financial information in one place- a personalized, secure Web portal, accessed by computer or smart phone. Link your 401k, IRA, investments, annuities and cash accounts from various institutions to a single Web page, with daily value updates. Next we categorize your financial resources into 8 easy to understand areas of wealth so that you can clearly identify and address financial concerns and/or successes. The final step is making decisions based on proper identification of your needs. The 8 Money Capsules are:

• Cash Reserves / Cash Flow  Seeks to provide cash reserve or cash flow for clients who require liquidity and or monthly income.
• Short-Term Goals  Seeks to provide low volatility investments.
• Long-Term Goals  Seeks to provide long-term capital appreciation by investing in diversified portfolios. Re-fills MoneyCapsule #1.
• Managing the Unexpected  Seeks to provide Asset Protection and Insurance for Disability, Long-Term Care, and Death.
• Income  Seeks to provide income and guaranteed life-time income. Money we can depend on for life.
• Wills, Advanced Directives & Trusts  Seeks to provide for the planned transfer of estate and control of assets, if incapacitated or in case of death.
• Family-Charitable Giving  Seeks to provide tax efficient strategies for transferring assets outside of one’s estate, for lifetime and legacy giving.
• Personal Values / Dreams  Personal values provide a reason for why we do the things we do. These decisions can have an important effect on our money decisions and risk tolerance.

If you’d like more information on the MoneyCapsules concept or would like to schedule a phone or in-person meeting, feel free to contact me.

Russell Bailyn

--
Wealth Manager
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

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.

Organize Your Financial Life Using MoneyCapsules

2010-03-11T20:41:27Z

• Cash Reserves / Cash Flow -> Seeks to provide cash reserve or cash flow for clients who require liquidity and or monthly income.
• Short-Term Goals -> Seeks to provide low volatility investments.
• Long-Term Goals -> Seeks to provide long-term capital appreciation by investing in diversified portfolios. Re-fills MoneyCapsule #1.
• Managing the Unexpected -> Seeks to provide Asset Protection and Insurance for Disability, Long-Term Care, and Death.
• Income -> Seeks to provide income and guaranteed life-time income. Money we can depend on for life.
• Wills, Advanced Directives & Trusts -> Seeks to provide for the planned transfer of estate and control of assets, if incapacitated or in case of death.
• Family-Charitable Giving -> Seeks to provide tax efficient strategies for transferring assets outside of one’s estate, for lifetime and legacy giving.
• Personal Values / Dreams -> Personal values provide a reason for why we do the things we do. These decisions can have an important effect on our money decisions and risk tolerance.

If you’d like more information on the MoneyCapsules concept or would like to schedule a phone or in-person meeting, feel free to contact me.

Russell Bailyn

--
Wealth Manager
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

Fundamental Indexing Shines in Volatile Markets

2010-02-26T17:15:13Z

If you’re a client of mine, or have ever engaged in a conversation with me about managing investments, then you know I’m a big fan of indexes and low-cost investing. I’m still a fan of the occasional manager who consistently outperforms his/her benchmark but I’m still skeptical that it’s worth the added expense over a long period of time. Today’s post is specifically about fundamental indexing. For those of you out of the loop about fundamental indexing, it’s a strategy which equal-weights the stocks in an index instead of weighting the index holdings based on market capitalization. When you weight based on market cap the way major indexes such as the S&P 500 do, your index inevitably invests the majority of its money in the top holdings. For example, the 20 largest companies in the S&P 500 comprise just over 32% of the index. The other 480 stocks comprise just under 68% of the index. While these market-cap indexes may be more accurately reflecting the economy, they may not be helping your portfolio…

]]> The statistics show that fundamental indexing is working. Not only have equal-weighted indexes dramatically outperformed their market-cap peers over the past year, but the past year has been one of the most volatile and treacherous for investors in recent memory. As of 2/25/2010, the fundamental indexing strategy (as measured by the RAFI US 1000 index) has outperformed the S&P 500 by 20.67%. Over two and five-year periods the returns narrow to slightly less impressive but still respectable 10%.

After reading through various reports comparing the two indexing styles, many have pointed out that fundamental indexing comes with a slightly higher degree of risk, as measured by a standard deviation which is 3.3% greater with the RAFI index. So, you would be experiencing a slightly higher degree of volatility when you chop out some of your largest blue-chip stocks.

What can we draw from this comparison? In my practice, I’ve increased my exposure to unique indexing strategies over the years. I haven’t really embraced the really obscure indexing strategies without proven track records yet, but fundamental indexing has been something which I’ve increased exposure to over the years. I would recommend to investors that they consider diversifying their indexing strategy to include both market-cap and equal-weight exposure.

As for the added cost associated with equal-weight indexes; when you’re talking about a jump from .2% to .58% (S&P 500 vs. RAFI 1000 index) you’re not exactly getting ripped off.

Questions 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 *231
F: 212-752-7673
rbailyn@premieradvisors.net

All investing involves risk. One cannot invest directly in an index.

A Closer Look at the Roth Conversion

2010-02-18T20:53:47Z

Roth IRAs are very trendy right now. “Trendy” isn’t a word I usually use to describe financial products and services but in this case I think it applies. Many investors are so concerned about upcoming tax rate hikes that they are more than willing to forego a tax deduction today if it means not having to worry about rising rates in the future. Starting in 2010, anyone can convert a traditional IRA to a Roth. SEP and SIMPLE IRAs can be converted as well. Before 2010, only individuals with adjusted gross incomes below 100K could do the Roth conversion. So, this opens the door for lots of wealthier Americans to make this switch. No surprise the government is looking for new sources of tax revenue now as they have plenty of fiscal problems to deal with. Below is a list of questions I’ve been fielding regarding IRAs and the Roth conversion.

]]> What are the core differences between traditional and Roth IRAs?

Traditional IRA contributions are always tax deductible if neither you nor your spouse is actively participating in an employer-sponsored retirement plan such as a 401k. So, here’s a simplified example: If you earn $50,000 and put $5,000 in a traditional IRA, you’d pay taxes based on $45,000 instead of $50,000. This can increase your tax refund if you have substantial tax withholdings from your gross pay. Again, the main benefit with a traditional IRA is a tax deduction now, and you pay income tax on your money when you eventually take distributions, presumably later on during retirement.

Roth IRA contributions are made on an after-tax basis and are not taxed when withdrawn. So you don’t get the tax benefit now, you get it later. Like a traditional IRA, Roth IRA investment earnings accumulate without having to pay current taxes on them. However, as opposed to a traditional IRA, qualified withdrawals of Roth IRA earnings are tax free.

Why would you want to convert to a Roth IRA?

A Roth IRA can provide tax-free income after you retire. And, unlike distributions from a traditional IRA, qualified Roth distributions are not included in income for purposes of determining whether Social Security benefits are taxable. Also, traditional IRAs require distributions once the account holder reaches age 70 ½, increasing the likelihood that Uncle Sam can take a bite out of your earnings while you are still alive. Roth IRAs do not have minimum required distributions, allowing the account to (hopefully) grow on a tax-deferred basis for longer. Beneficiaries do have to take distributions but those are still not subject to income taxes so long as the Roth has been in existence for 5 years.

What are the tax consequences of converting a traditional IRA to a Roth IRA?

This is the sting. When you convert to a Roth, any deductible contributions you made and any accumulated earnings in the traditional IRA become taxable. However, even if you’re younger than age 59 ½, you won’t be liable for the 10% early withdrawal penalty on the conversion. Lucky for investors, if they convert in 2010, they can split the tax bill over two years, 2011 and 2012. This may soften the blow a little for taxpayers and make it possible for some less wealthy investors to convert to a Roth. You don’t have to split the tax over two years but you have the option.

Who should consider a Roth IRA conversion?

Like most things in this business, the conversion decision is very personal because everybody’s situation is different. In general, you will likely benefit from a Roth IRA conversion if:
• You think you’ll be in the same tax bracket or higher in the future—even when you retire.
• You have a low account balance now but expect the value of your account to be significantly higher in the future.
• The younger you are, the more likely you are to benefit (time value of tax-deferred investment accounts).
• If you don’t think you’ll need all of your retirement savings, converting to a Roth could potentially allow you to provide your beneficiaries with tax-free income.
• If you have the resources to pay the conversion tax not out of your IRA. This is why people with savings outside of their IRA accounts (generally people with slightly higher incomes) will often stand to benefit more from the conversion.

What if I convert and then my account value drops?

This is an important question to answer because it poses what could end up being an unfortunate scenario. Let’s say you convert 50K and then your account value drops to 40K, you would indeed have to pay income taxes based on the balance at the time of conversion (50K). If it drops and you change your mind about the conversion, you can recharacterize back to a traditional IRA and no longer owe tax on the conversion. For this reason, it makes sense to wait until the latest possible date to covert. Recharacterizations can be processed until October 15th of the year following when you convert.

Because going through the Roth conversion will increase your tax bill, consider the effect it may have on your overall tax situation. You may have other credits/deductions which you can’t take as a result of pushing your AGI higher with the conversion. I know that’s a tricky thing to think about, but programs like Turbo Tax makes it easy to try various scenarios and see what works best for your situation.

Questions or comments? Feel free to call or e-mail me.

Russell Bailyn

--
Wealth Manager
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

Bringing Real Reform to the 401(k) Industry: H.R. 2989

2010-02-05T18:28:11Z

I’ve written at length about problems within the retirement plan system here in America. Perhaps the biggest drawback for employees is that those secure pensions of the 80’s and 90’s are, for the most part, being replaced by employee-funded 401(k) and 403(b) plans. While it may seem like only an operational switch, it’s actually a huge downgrade for most employees. Instead of having definite figures to rely on for future financial security, workers have to rely on themselves to save and the markets to make their savings grow. As we’ve seen over the past decade, the markets don’t always do us favors. Most investors, especially those nearing retirement, would have been better off putting that money into a bank account with little or no interest from 2000 to now. That would at least have eliminated the panic and emotional madness which most investors have been experiencing. Since we can’t predict what the markets will do in the future and trillions of dollars remain in retirement plan investments, the best we can do is hope for some real and genuine reform:

]]> Of all the areas which deserve reform within the retirement plan industry, disclosure of retirement plan fees should be high on the list. Many participants have no clue about what costs they pay to participate in and maintain retirement plans. Those costs are well hidden beneath secretive “expense ratios” and blended into the daily pricing of many investments which we think is only reflecting market performance. Sneaky, sneaky! Fortunately, some members of government are working to resolve these problems by way of H.R. 2989 (The 401k Fair Disclosure and Pension Security Act). This badly needed legislation would do the following:

• Require 401(k) plans to disclose fees in one dollar figure taken from participants accounts in a worker’s quarterly statement;
• Require 401(k) service providers and plan administrators to disclose fees charged on 401(k) plans broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees;
• Help workers understand their investment options by providing basic investment information, including information on risk, return, and investment objectives;
• Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
• Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest;
• Ensure that if workers get investment advice through their jobs, that advice be based on the workers’ needs – not the financial interest of those providing the advice;
• Provide adjustments to pension funding rules to ensure plans can weather the economic crisis without being forced to choose between cutting jobs or freezing plans.

Something else which would greatly benefit retirement plan participants would be clearer rules on investment advice. As the system currently stands, most investment advice is provided by the same insurance and fund companies which administer the plan (basically wolves in sheep’s clothing as FA magazine so aptly calls it). Participants should recognize this clear conflict of interest and seek advice from independent, unbiased third party providers.

Any hope of serious reform depends to a large extent on what else is on the docket for lawmakers in the coming months. If health-care remains the focus, it means less time, attention and dollars dedicated to the retirement system. If Republicans win some seats in the mid-term election that could also stall retirement plan reform. No matter what, let’s hope the Department of Labor recognizes the awful position so many Americans are in right now when it comes to their retirement plans and tries to bring a little common sense into the system.

Questions or comments? Please e-mail me.

Russell Bailyn

--
Wealth Manager
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

Tax Season: Tips & Changes for 2009

2010-01-25T20:59:19Z

Welcome to my annual tax post. I’m feeling pretty confident heading into this year’s tax season as it appears the average person will pay less tax and have more credits/deductions than last year. I wish I could say that trend is likely to continue in the future but it’s quite clear at this point that tax rates will be rising in 2010. The government must take action to counter the massive spending binge it’s been on of late. With Obama in the hot seat its pretty clear tax rates will be moving up, particularly for higher income earners. Combine that with the expiration of Bush’s tax cuts and future tax seasons start to look real ugly. In light of that, let’s focus on the positive for now.

]]> On the upside, the personal exemption has jumped in 2009 to $3,650, up $150 from 2008. For married couples filing joint tax returns the personal exemption amount is $7,300. The standard deduction (used by those who don’t itemize deductions) has jumped $250 to $5,700 for single individuals or $11,400 for married couple filing joint tax returns.

We’re also seeing an upward adjustment (roughly 5%) in tax rates from 2008. What that basically means is that you may not jump into a higher bracket if you earned slightly more income in 2009. For a person who earns $100,000 per year, they would pay roughly $258 less in 2009 than they did in 2008. I like this change because it benefits all taxpayers, not just those with low adjusted gross incomes.

What won’t help some wealthier individuals is the increase on the exemption for the alternative minimum tax. This will subject more people to this nasty tax. What will help low and moderately-low income earners is that more people will qualify for the earned income tax credit in 2009. Those with three or more children will also see an additional credit.

What could help a variety of taxpayers is the plethora of new credits, ranging from cash-for-clunkers to the popular homebuyer credit and the credits related to energy efficiency in the home. Education credits have also been expanded with the American Opportunity Credit expanding upon the Hope and Lifetime Learning credits.

All things said this year won’t be that different from last year. Most people will probably save a few bucks but like most things in the financial world, it varies on a case by case basis.

If you have any questions about your individual tax situation please don’t hesitate to contact me. Attached is a list of new limits and changes for easy reference: Download file

Russell Bailyn
--
Wealth Manager
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

The opinions expressed are for general information only and are not intended to provide specific tax advice for any individual. To determine which tax strategies may be appropriate for you, consult with your financial or tax adviser.

Avoiding Losses over Capturing Gains: New Money Management Strategies for 2010

2010-01-19T18:03:30Z

Some baby boomers still think of smart investing as buying and holding a portfolio of blue chip stocks. Such investors, lost in their memories of stable dividends and low volatility, cringe at the idea of trading in their blue chips for index investments. They also cringe at the inclusion of commodities in newer, diversified portfolio models. The reality is that the past decade, plagued by high volatility and market scandals, has changed the investment landscape, quite possibly forever. The recession of 2008-2009 has also caused a major attitude change for investors. Whereas capturing big gains was the priority during most of the past decade, many investors I’ve been speaking with are now more focused on asset conservation and risk avoidance.

]]> First, I think the traditional view of buying and holding individual stocks for growth and dividends have changed, probably forever, by the emergence of low-cost index products. Transitioning from individual stocks to index products has dramatically improved the averaged investor’s ability to diversify and has also more than likely reduced their trading costs. This months’ issue of Journal of Indexes magazine concludes that a happy medium is emerging in which traditionally passive investors are becoming slightly more active. Actions such as portfolio rebalancing and index optimization create activity in portfolios, even when they don’t require any action on behalf of investors.*

In terms of risk reduction, I think an initial step to reducing a client’s exposure to risk is explaining that merely including stocks in one’s portfolio does not guarantee long-term gains within a portfolio. A well diversified portfolio should include the basic asset classes of stocks, bonds and cash. Within each of those asset classes should be a considerable amount of micromanagement.

Because so many investors utilize packaged products to gain instant diversification and active management, that industry is jumping on the risk reduction bandwagon as well. In the past year a plethora of new financial products have been introduced which are “market neutral” or “balanced-risk.” These products do a number of things which stray from the traditional 50/50 or 60/40 stocks/bonds portfolios. They tend to hold larger allocations at cash, hold commodities, short (bet against) securities, and employ other non-traditional strategies. The goal for these products is to thrive in environments where stocks and bonds can’t do all the work. Most of these products also try to avoid the wild volatility found within stocks and commodities. As a result, they hold more bonds and cash equivalents which lead to underperformance during bull markets. As far as these managers are concerned that isn’t such a big deal since the primary goal is to avoid excessive losses and the secondary goal is performance.

Financial intellectuals including Robert Arnott and Jeremy Siegel believe updating the way indexes are calculated can also help reduce risk and improve portfolio diversification. Major indexes such as the S&P 500 weight their index by market cap, which means larger firms achieve more exposure in the average investor’s portfolio. According to Arnott, a portfolio comprised of equally (fundamentally) weighted indexes which includes exposure to domestic stocks, international stocks, corporate and government bonds, real estate, and commodities would have dramatically outperformed a domestic stock-only portfolio over the past 10 years.** While fundamental indexing critics will point out that this is simply a glorified value-investing strategy, Arnott would surely argue it’s more than a trend.

Can updating our traditional investment philosophies improve our portfolio performance? Time will tell but many suggest it will.

Russell Bailyn
--
Wealth Manager
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

*Portfolio Rebalancing involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider one’s ability to continue purchasing through periods of low price levels. Portfolio Rebalancing does not ensure a profit or protect against loss in declining markets.

**For 2009 performance figures regarding fundamental indexing, please visit www.researchaffiliates.com. Under Performance, the FTSE FAFI Index has outperformed the S&P 500 index by 15.52% over the past 12 months ended 12/31/2009.

Is Holiday Gift-Giving a Waste of Money?

2009-12-22T16:27:21Z

When I do budgets with my clients, I’m frequently shocked at the annual outlay for gifts. After housing and food, gifting is one of the larger annual expenses for individuals in terms of percentage of income dedicated to it. For one of my clients who earns around $100,000 per year gifts accounted for roughly $3,500 (3.5%) of her gross income. For another client who only earns around $60,000 gifts accounted for almost $2,400 (4%) of her annual income. And that’s after taxes! The percentage of income dedicated to gifts was noticeably higher for people in their late 20’s and early 30’s when wedding season tends to hit hardest. So the question begs itself: does gift giving come back to reward you, or bite you?

]]> I’ve got to say bite you—and often bite you hard. I say this not just because giving gifts requires spending money, but also because the amount of utility recognized for items purchased as gifts is often much lower than items purchased by a person for him/herself. Clearly I’m disregarding the whole sentiment angle—the bubbly, warm feeling people get when purchasing a gift for someone else. There’s also that lovely moment of shock for the recipient when they learn that someone else spent time and money on them without their knowledge.

Joel Waldfogel, author of the book Scrooged: Why You Shouldn’t Buy Presents for the Holidays, makes the interesting point that retail campaigns designed to encourage holiday spending lead to many inconsistencies in terms of matching products with users. People feel pressured into holiday spending an often blow money in the holiday spirit, not because they’ve successfully matched an appropriate gift for an appreciative recipient. Waldfogel goes on to analyze the amount of money spent on gifts and compare the utility of those gifts vs. things he may purchase for himself. On average, gifts get 20-30% less utility than items purchased by oneself. Why? Well, it’s fairly obvious. People giving gifts don’t know exactly what you want and they don’t know exactly what you have. They also can’t navigate around the particulars of a gift such as exact colors and sizes the way you could. Therefore, they make a worse purchase than you would have with the same number of dollars.

So what can we conclude from all of this? Not a whole lot. Gift giving is an important part of our culture and is likely to stay that way. What we can do is carefully consider the recipient and attempt to find something which they will appreciate that isn’t overly expensive. People who don’t earn a huge amount of money should focus more on the thoughtful aspect of gifting and try to spend only 1-2% of their after-tax income on gifts. The most important thing is to be honest with oneself and others about what is reasonable to spend and what you can afford to spend. Take someone out to dinner if you can’t afford to buy them a $100 gift. Buying a few good books or DVDs is often a less expensive way to provide someone else with many hours of enjoyment.

Happy holidays to my readers! See you in the New Year.

Russell Bailyn
--
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

The Dollar: Too Big to Fail?

2009-12-17T21:55:12Z

There is an interesting article in this month’s Financial Planning Magazine which questions how realistic it is for the dollar to “fail” on a global scale. These sorts of articles aren’t unusual these days as much debate takes place over US debt, continued foreign investment, rising gold prices, etc. The article’s main contributor, Frank Wei of FundQuest, argues that the dollar is too important to both the global economy and the financial system for it to experience a sudden collapse. Any further declines, he argues, will be gradual.

]]> Among the major causes for concern by investors right now is the long and continuous period of low interest rates which encourages the printing of new dollars. Because of how many global products are priced in dollars (i.e. oil) a collapse would instantly shock the world in a similar fashion to how systemic risk fears plagued the global equity markets and forced emergency policy action during 2008 and early 2009.

A weaker dollar means inflation, right? Not necessarily. The way Americans measure inflation is primarily through CPI, a measure of the prices of goods and services commonly consumed in our economy. As it currently stands, housing prices comprise roughly 40% of the CPI basket. Unless you believe housing prices will rise sharply during 2010, rampant inflation is unlikely, at least during 2010. Along those lines, the number of Americans struggling to make their ballooning mortgage payments will more than likely curb spending in other parts of the economy during 2010. If consumer spending remains flat, it becomes much less likely we’ll experience runaway inflation.

Next, we have the automatic defenses or “hedges” which surround the weak dollar. For one, US stocks have been rising as the dollar falls against other currencies. This relationship has been dominating the equity markets over the past few months although just recently we’re seeing equity prices rise even with a stronger dollar. As the dollar continues to drop, Asia, Europe and others have been snapping up US goods and services trading at sale prices. The subsequent rise in equity prices is good for the economy, at least in the short run. Second, as the dollar declines, US exports become cheaper, reducing the price of our debt payments. This helps China who can use the proceeds of cheaper exports to offset the potential for losses on US debt.

Even if the dollar continues to decline, which most money managers agree that it will, I don’t see doomsday coming. I mean, how many times have we seen this before? The dollar declined heavily in the 1970’s, the early 80’s and early 90’s. Everybody talked about China and others removing their peg to the dollar during those periods. What ultimately happened? People realized there isn’t an adequate substitute to the dollar and stuck with us. I would imagine the same thing is likely to happen again. Further, even if another currency were to ultimately replace the dollar globally, it probably wouldn’t be in collapse fashion but through a gradual transition. Because the US consumes a tremendous amount of goods and services, the manufacturers of those goods around the world want our economy, and our dollar, to avoid collapse. It would benefit those countries selling finished goods to the US for the dollar to decline at a measured pace rather than suddenly.

Question or comments? E-mail me.

Russell Bailyn
--
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

Fixing the 401k Problem

2009-12-04T19:24:52Z

The 401k industry is in a pretty sweet spot. Corporate pensions are quickly becoming obsolete and now more than ever employees need to rely on their own ability to save money. What could be easier than an automatic payroll deduction plan such as a 401k or 403b which provides tax-deferred growth and in some cases an employer match? Many people I know who really don’t have much investment savvy accept the 401k as one of those investment programs which they need to sign up for and that’s all there is to it. Sounds a little hasty, right? Well, according to a 2008 survey discussed in the November, 2009 issue of Registered Rep magazine (Introducing 401k 2.0), about 77% of 401k plan participants claim to have little, basic or no level of investment understanding. And despite Department of Labor requirements regarding improved efforts to educate participants, the reality is that many people simply don’t have the time or energy or desire to educate themselves about stock and bond investments. What they really need is good advice—a person or team of people whom they can reach out to on short notice to provide specific advice relevant to each participant’s situation.

]]> As an advisor, part of my concern regarding the 401k industry stems from its complexity. Because of my experience administering and monitoring retirement programs, I’m fairly knowledgeable on the fees, expenses, investment options, service issues, tax issues and economic factors related to 401k plans. I’m also current on the issue of after-tax (Roth) contributions which have been all the rage lately. The way I see it, a 401k plan participant should be not merely be given an enrollment document and left with a pen to check off boxes. The concept of “auto-enrollment” is good only in that it encourages greater levels of savings. It’s dangerous in that ordinary investors could be making hurtful decisions in terms of their own tax consequences, liquidity needs, tolerance for risk, etc. I think a 401k enrollment application should be filled out by an employee with an advisor present who doesn’t have any conflict of interest (i.e. getting paid by) the retirement plan.

The 401k industry has traditionally been led by Wall Street. 401k is “product” which is actively sold to the tune of trillions of dollars to millions of Americans. It’s time for us to move the focus away from the profits of large and financially comfortable firms and onto the needs of the participants, many of which face a looming retirement crisis. With the first round of baby boomers starting to retire, the advisor community needs to band together on the issue of not letting retirees outlive their money. And while honest financial professionals deserve to get paid for their time and knowledge, they’ve got to remember that serving their clients objectively should be the #1 priority.

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

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

The Roth IRA Conversion Opportunity in 2010

2009-11-17T20:15:15Z

I’ve been fielding a lot of inquiries lately about Roth IRA tax planning for the future. Let me do my best to explain who should be doing what in terms of Roth conversions for 2010. Let me preface this by saying none of this is an exact science. There are all sorts of moving parts in the tax code and naturally we have no clue where tax rates are going after 2010. We do know they are not changing for 2010 so any planning we do over the next 12 months or so should be for 2011 and beyond.

]]> What I think is likely for 2011 is that marginal tax rates will increase, specifically for small businesses and those earnings over $250,000. It seems inevitable that rates move higher given the level of government spending taking place right now to counter the recession. I don’t believe in the extreme tax hikes some are talking about but I think the marginal rate for the highest income earners will jump from 35% to somewhere around 40%. Any higher than that and you’ll start hearing talk about higher taxes slowing down the growth engine and falling on the shoulders of small business owners with pass-through taxation, etc. We’ll know about these changes sometime during 2010.

Based on my math and what I’ve been hearing at seminars on the Roth conversion, the people that will benefit most are those that can afford to pay the conversion tax out of their own pockets and NOT from the account they are converting. If you were to pay the money out of the account you’re converting—and tax rates didn’t change—you’d be doing nothing but giving the government a gift of up-front taxes. By paying it out of pocket you are effectively adding more money into your Roth IRA which works out nicely in an environment in which tax rates increase and stay increased for the next 10 years or so. Further, if your tax bracket will drop when you retire (because you’re earnings less money) the Roth conversion also becomes a bit less attractive, bringing me back to the point that the government is looking more at high-earners and people with assets into the millions to prioritize doing these conversions.

If you’re under 59 ½ and paying a penalty by taking money out of your IRA to pay the conversion tax, you’re really not doing yourself any favors at all.

The way the rules read, if you do the conversion in 2010, you will pay ½ the conversion tax by April, 2011 (2010 tax return) and the other ½ by April, 2012 (2011 tax return). You can pay it all during 2010 but why give the government your money early? The only reason might be that during 2011 the highest marginal tax rates jump as we discussed above. Then the math becomes what you’re doing with that extra money in the 12 months between 2010 and 2011.

On another note, Congress has been allowing people not to take RMDs (required minimum distributions) during 2009 because it would be counterproductive to force people to take money out of their IRAs with the stock market at such low levels. With the stock market at higher levels now I find it unlikely they will extend waiving RMDs for 2010 and 2011 but who knows. If they do extend it, traditional IRAs become a bit more tolerable.

As far as I know, there is no age cap on who can do the conversion. Someone 62 or 82 can do it. There is also no income cap on doing the conversion. You can earn $80,000 or $800,000 and still convert. You can also convert directly from a traditional 401k or 403b into a Roth IRA without stopping into a traditional IRA first.

Also interesting is a piece I read this month by Darren Neuschwander, a CPA in Robertsdale, Alabama. Neuschwander notes that clients can choose to re-characterize BACK to a traditional IRA anytime until they file their tax return in 2011—which can be April 15th or October 15th if an extension is filed. Neuschwander notes that any client converting a decent amount of money during early 2010 should do a tax extension and carefully analyze the markets and incoming tax information so they can switch back to a traditional IRA if that math ultimately works better.

As always feel free to e-mail me with any questions. I’m not a CPA so any further details may best be answered by your tax professional.

Russell Bailyn
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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

Investors should consult their tax professional or financial advisor for more information regarding their specific tax situations.

Stability of Principal vs. Stability of Income - CDs vs. Variable Annuities

2009-11-10T19:18:24Z

Many conservative investors like Certificates of Deposit (CDs) because of their stability. It is true that your principal rarely fluctuates with a CD. However, the rate you get is variable, volatile and highly unpredictable as has been evidenced by interest rates in the economy over the past 15 years. As a result, if you were rolling over one-year CDs from the late 90’s until now, your income would have fluctuated dramatically. From 1996-1999, one-year rates ranged from about 4.5% - 6.5%: a respectable return for a conservative investor. Keep in mind that the stock market in those years was on fire, so that 5% CD rate may not have felt as warm and fuzzy as it would today. After year 2000, interest rates plunged and you were lucky to get 2% on a one-year CD. The same applies today as interest rates are low and CD investors find themselves scrambling for a ‘good rate’ such as 3% or maybe 4% if you lock in for years. So the new important question becomes, what is more important: stability of principal or stability of income?

]]> Some advisors might suggest that “income guarantees” are more valuable than “principal guarantees.” It becomes difficult to pay retirement expenses and/or plan a budget when every year the income derived from your CD investments changes dramatically. Part of the reason variable annuity sales have skyrocketed over the last few years is that insurance companies are able to offer living benefits including guaranteed income for life. Unlike CDs, annuities rarely make guarantees as to the principal value of your account. But they do provide several guarantees as to the income generated by the account, often for life. The concept of guaranteed income for life is very valuable to investors in an atmosphere in which the stock and bond markets are highly volatile and people are living much longer lives. The ‘peace-of-mind’ component often outweighs the added insurance expenses and people choose to have at least some portion of their retirement funds dedicated to this vehicle. It should be clear that any insurance promise of “guaranteed income for life” is subject to specific restrictions and limitations. For example, these options often require annuity owners to begin receiving income at particular ages with withdrawals limited to specific percentages or dollar amounts. Reading the full prospectus is the only way to get complete information on various product offerings.

Besides offering a more predictable income stream than CDs, variable annuities offer the potential to grow principal on a tax-deferred basis for retirement which may also provide value to your estate plan. It might pay if you’re a conservative investor nearing retirement to look into some variable annuity strategies in addition to those good old CDs.

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

*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 restrictions.

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.

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, risks, charges, limitations and expenses, please read the prospectus carefully before investing or sending money.

Purchasing an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. You should purchase an annuity for the contract features and benefits other than tax deferral.

My Issue with Mutual Funds

2009-11-03T21:26:34Z

There has been much debate over the past decade about the value proposition of actively-managed mutual funds to the average investor. The potential advantage which you’re really paying for with mutual funds is the possibility of choosing a brilliant portfolio manager who can beat their benchmark year after year. I’ll only break out one statistic here among the many which convey the same unfortunate message about the mutual fund industry: six out of ten actively managed stock funds underperformed their indices in 2008, primarily due to fees, according to the Center for Institutional Investment Management at the University of Albany. Besides the fact that actively managed mutual funds, on average, cost investors more to own than index and exchange-traded funds, they are also generally less transparent than index and exchange-traded funds. This isn’t necessarily a criticism of mutual funds, but an inherent operational difference between two very different investment products: mutual funds and exchange-traded funds.

]]> At the time when mutual funds really gained in popularity (the 80’s) the stock market seemed to only move up. Having a nice diversified basket of securities with an active manager was a fine idea. The past ten years have taught us many lessons about the volatility inherent in stock and bond investing and have alienated plenty of 1980’s and 1990’s investors who can’t take the constant fluctuation. So what should you do?

Unfortunately, retirement plans such as 401ks and 403bs usually only allow investors access to actively managed mutual funds. Some offer access to index funds and rarely an exchange-traded fund will make its way onto the menu. Some critics of the mutual fund industry, such as pension expert Matthew Hutcheson have done studies highlighting the long-term potential damage to retirement plan investors caused by excessive costs, hidden fees and an overall lack of industry accountability.*

The Hutcheson paper referenced above also itemizes the different sorts of expenses which are paid by the investor from mutual fund expense ratios. I found, and I'm sure many investors would agree, many of these costs are onerous and burdensome.

My point is basically that many investors have incomplete information about the mutual fund industry. The opinion which has been surfacing more and more lately in financial journals is that investors should pay attention to what they can control—namely fees and expenses within their investment portfolios. In my opinion, one way to do that is through less exposure to actively managed funds and more exposure to cheaper and cleaner portfolios using individual stocks, bonds, and index-style investments.

Russell Bailyn
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Investing in mutual funds involves risk, including possible loss of principle.

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a prospectus, which contains this and other information about a fund, you may contact your investment representative or call the investment company directly. Please read the prospectus carefully before investing or sending money.

*Matthew D. Hutcheson, MS, CPC, AIFA, CRC -- Uncovering and Understanding Hidden Fees in Qualified Retirement Plans: University of Illinois Elder Law Journal: Fall 2007

Will the Bull March On?

2009-10-28T19:08:22Z

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
--
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

Money Management Decisions for High Net-Worth Individuals

2009-10-26T18:54:12Z

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
--
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.

*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.