Update on the impact of the 3.8% Medicare surtax

Experimented with some returns on our tax software, here is an example of the impact of the surcharge, from forms 8959 and 8960, on the taxes due.

For a client with high W-2 income, as well as interest and dividend income, shifting $100,000 of income from dividends to W-2 income decreased the surcharge by $3,630 (the taxes remained unchanged).

In contrast, shifting $100,000 of salary to dividends increases the surcharge by $3,601 as does shifting $100,000 of salary to capital gains.

The message so far is: when there is substantial earned income, minimizing investment income is worth over 3% for the amount you move. That means that, all other factors being equal, an investment that had no interest, dividend or capital gains distributions will have a better after-tax return than one that does.

Roth IRA, to convert or not to convert?

The answer depends on your tax rate now and expected tax rate when you plan to take withdrawals. Also, you should consider this only if you can cover the taxes with funds from outside of your IRAs, otherwise you are forfeiting the tax deferral on those funds.

For example, someone with a low tax rate now, from large losses, large deductions or low income, may have less in taxes to pay now so that the rate of tax is less than what it could be in the future, making converting a wise financial move.

As a separate matter, the taxes can be paid over two years, however, if you expect a higher rate for 2011, the interest you earn will not make it worth waiting.

Someone with high taxes now, or in the AMT, would be a bad candidate for converting.

If you are considering this and want more analysis, we created a tool for that purpose so let us know.

Investment planning: health care reform and opportunities

Any change will hurt some and benefit others. For investing, selecting the former to sell and the latter to buy will be crucial as the health care reform become implemented.

It is not typical for me to reference self-serving statements from managers, but the following links are well written and make you consider options for investing (in or outside of the Artio fund):

Artio Sector, Spotlight-Healthcare And see also Forbes on healthcare, personal finance, investing ideas and small-caps

The white paper published by Artio Smallcap Fund concludes with this summary:

All four of these investment themes have particular relevance in the smallcap arena. We believe each represents compelling investment potential over the long-term, given the growing need for cost reduction in the healthcare sector. We continue to explore these and other investment ideas related to healthcare trends in the Artio US Smallcap Fund.

What do you think? Let me know.

Let us know if you have questions or comments. Thanks,


Shaken Investor Confidence – restoring faith in investment managers

The article below on client satisfaction intrigues me. (And you can comment below or ask us for input Did you get the best investment advice before the crash?)

Typically, my clients are very candid about their views regarding investment selection. However, the article suggests that many investors may just be waiting to get back to even before switching…

What really makes me wonder is: (1) what more could advisors and investment managers have done to prove that there was no more that they could have known in time to act any differently, and (2) how do we rebuild confidence when so many people were rattled so much financially and emotionally?

Simply repeating the platitudes that investment allocation works over time is not enough to cure the shaken confidence.

What are your insights? What ideas do you have on the issue? Let me know.



02-19-10 | 12:51pm
Client Satisfaction

Since the beginning of the market downturn in August 2008 through June 2009, investor satisfaction with their advisors has fallen from 67% of households being satisfied to 55% of households, according to a Cerulli survey. In addition, investors’ trust in financial firms is at abysmal levels, with only 26% of households believing that financial firms are looking out for their best interests.

Based on these numbers, many industry experts predicted a deluge of client movement as clients left their advisors to find better service and performance. Cerulli, however, has detected only a slight uptick in the number of investors switching financial providers. In fact, most of the movement of clients between firms has been tied to advisors moving between firms and taking their book of business along.

In Cerulli’s view, this data should not necessarily re-assure advisors that their client relationships are safe. While most investors have not left their current advisors, many have been waiting until market conditions settle before making a move. In addition, investors indicated that they are less likely to turn to their existing advisor for a new financial product or service. In August 2008, 70% of investors surveyed indicated that they would seek new products and services from their primary advisor, but by June 2009, that number had fallen to 59% of investors.

Finally, among high-net-worth clients, Cerulli has found a notable trend of investors maintaining more advisory relationships than in the past. It appears that high-net-worth investors have generalized the idea of diversification beyond investments to apply to their advisory relationships. In light of the failure of some well-respected firms during the financial crisis, high-net-worth investors are less willing to rely on a single advisor or a single firm. This indicates that going forward advisors serving high-net-worth clients will maintain a lower share-of-wallet of their clients’ assets and may have a reduced role in influencing their client’s financial decisions.

While inertia will likely keep most investors in their current advisory relationships, advisors would be wise to assess their clients’ level of satisfaction as well as the role the advisor plays in clients’ financial decision-making. Advisors should work to re-assert their value proposition with their clients to show their clients the relationship is worth the cost.

Likelihood to Seek New Products or Services from Primary Advisor by Channel (graph not shown)

Source: Cerulli Associates, Phoenix Marketing International

Here is a related article:

What Are You Scared Of?

I’ve been thinking a lot about fear and the impact it has on our industry–specifically, the communication strategies we use as financial advisors; the nature of our advice and the ability to do our job; and investors and the public in general.

Maybe it’s just me, but it seems our industry is scared of having strong opinions. I understand that making public statements about market forecasts, performance predictions, and guarantees of any sort would be a legitimate cause for concern. But if you put all of those legitimate concerns in a bucket, it seems to me that it’s a rather small bucket. So why are we scared of strong opinions?

Is it possible that this small set of legitimate fears is having a greater impact than it should on the rest of our business? We seem to no longer know what we can have strong opinions about. For example, at what point is it OK for us to respond to criticism or to defend ourselves publicly? There have certainly been a lot of negative things written about us, so at what point is it OK for us to share all the positive things we’ve been doing? Certainly, it’s OK to share our opinions about how we charge for advice and wisdom, how we make decisions, and how we communicate with clients.

This fear isn’t isolated to how we run our businesses. Fear has always played a major role in how we make decisions about money, but the in the last two years, it seems to have become part of our national conversation. I can’t remember a time where there was more fear of the future, fear of the unknown, and fear of the “economy”–whatever that is–and all these issues are out of our control. So what can we do to help clients deal with them?

One of our primary goals (and one of the reasons why I think long-term relationships are so important in financial planning) is to give clients an opportunity to download their fears. But in helping them understand the difference between rational and irrational fear, how do we avoid the same problem ourselves?

Investment Planning: fear index and your asset allocation

Recent world events (China, banking regulations, Haiti, etc.), and corresponding market moves, have lead investors to become concerned about US stocks. The VIX index, also known as “the fear index”, is about as low as it was when Lehman Brothers collapsed in 2008 – a very low number.

Is this indicator rational and should act or should you continue to stick to your long-term investment strategy, and your asset allocation?

First, on volatility, there are hedges that some can buy but many are currently over-priced. That is, you can attempt to replicate the VIX Index and benefit from its contrary motion against the stock market as a form of “portfolio insurance”. However, because so many investors are concerned, they have over-bought this index, or its components, so it is not favorably priced, making this a bad time to buy.

Second, on stocks and ultimately on your asset allocation, does the index still tell you that you need to sell stocks? If you did, you always have the timing issue of when to buy back in (see the quotation below). Also, the fear index could, in fact, be a contrary indicator, indicating that you should not sell, just as when individual investors buy or sell, you should sell or buy.

Third, the worry is that the recent upswing means that stocks are over-priced now. However, the P/E ratio is neither as high as 2000 nor as low as the long-term average of 18. So the index does not necessarily sound a warning bell for mass sale of stocks.

A better response for arguing that you should adhere to your allocation is summarized by John Coumarianos, who is a mutual fund analyst with Morningstar: “Investors tend to time their allocation shifts poorly, doing themselves much harm along the way. That’s largely because they make such moves based on emotion rather than hard facts. For example, many investors abandoned stocks at the depth of the crisis in 2008, missing the big comeback in 2009. Our statistics on Investor Returns are grim. They prove that most investors do an awful job of timing the market, consistently selling low and buying high.”

He goes on to argue that you need to rely on mutual fund and other investment managers to go into cash when appropriate and then move back into stocks, based on their expertise and analysis, which is totally independent of the fear index.

As I have often said, having a long-term strategy and sticking to it is the key to achieving good returns over time. This often requires ignoring what others say, what the press or information like the fear index says, and your own sense of anxiety. A good portfolio will have both ups and downs, but it will work for you if you let it.